Extent of UK PAYE Tax System Fiasco Becomes Clearer

The UK's Her Majesty's Revenue and Customs Pay-As-You-Earn (PAYE) computerized tax system fiasco just keeps getting wider and weirder.

As you may recall, in June, it came to light that at least 100,000 UK taxpayers would likely be paying too much tax in the last tax year for numerous reasons including being placed in an incorrect tax bracket because of errors in the new HMRC computer system database.

That disclosure caused a great gnashing of teeth, since the new HMRC computer system was designed to eliminate these types of problems. It also caused a lot of "I told you so" comments, since tax experts (and some Revenue and Custom employees themselves) had been warning for some time that the new computer system would be causing these issues.

Well, now it appears that after a review of tax returns by Revenue and Customs, some 4.3 million UK taxpayers have indeed paid too much in taxes between 2008 and April of this year. The average sum owed, the London Telegraph reported in an article published over the weekend, is about £400.

Furthermore, another 1.5 million UK taxpayers are soon going to receive a letter from HM Revenue and Customs telling them that they owe on average £1,428 in taxes from the same period.

This new disclosure has cause more than a bit of a political firestorm.

To add more fuel to the fire, this other Telegraph story reports that another 6 million UK taxpayers are likely owed tax refunds from years prior to 2008; possibly another 1.7 million will owe taxes as well. However, it may be four years before those owed a refund see their money.

London papers such as the Telegraph and Daily Mail among others have published stories today quoting tax experts about how taxpayers receiving Revenue and Custom letters can fight back using various "loopholes" to avoid paying back the money they are said to owe.

Some are even calling this the beginning of the "Great Tax Revolt," which could gather momentum if one of the ideas to solve the PAYE automation problem is put into place. 

What is being suggested is that UK employers pay a worker's salary to HM Revenue and Customs, which would make the tax deductions required, and then send the worker whatever his or her salary that was left.

I know that idea wouldn't last a nanosecond in the US.

To be fair, it is not really surprising that HM Revenue and Customs automated tax system is having a hard time sorting things out properly. According to this Telegraph blog post, "... the size of Tolley’s Tax Guide - the authoritative users’ manual for our [UK] fiscal statutes - more than doubled from 4,998 pages to 11,520 pages" since 1997.

That's a lot of IT system requirements changes to deal with.

HM Treasury official was quoted in a Telegraph article as saying, "A decade of meddling and intervening made the tax affairs of millions of families and businesses across the UK extremely complicated."

No doubt. The Treasury official should look at the US, however, if he wants to see complicated.

As a comparison, the Standard Federal Tax Reporter, which explains the US tax code to accountants, now takes a total of over 71,000 pages to explain it. No wonder that the US Internal Revenue Service's Business Systems Modernization has been on the US General Accountability Office (GAO) High Risk List since 1995 (when the Tax Reporter needed "merely" 40,500 pages to explain the US tax code).

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