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An image of Rutton ViccajeeIn our latest article, Rutton Viccajee demystifies the PAYE system and explains how and why problems may arise.

 

I pay tax under PAYE – so why do I owe tax? Why did not HMRC take the right amount? Surely they should pay if they don’t?

As an accountant in practice, this is a frequent question, and a deeply troubling one.

In theory, PAYE is a great system, pay as you go, and leave the tax system to others to comply with and sort out. All you have to do is not worry, and spend your nett pay, until next payday.

The trouble is, PAYE is only accurate in the simplest of situations. Complications soon arise, which is probably why you are reading this article.

“But my affairs are so simple!” I hear you cry. Yes I know, that’s what all my clients with tax problems say.

“But no, MY affairs really ARE simple!” They invariably reply. Yes, I know. But as I say, complications soon arise, without you realising.

If you have one job all tax year, no other income or tax allowable expenses, and a correct tax code, then read no further. It’s plain sailing.

But the slightest ripple on the surface of this smooth tax pond will cause problems. Examples are legion, but a VERY brief list would include:
– anyone into higher rates of tax,
– anyone with more than one source of income, including pensions, and
– anyone with gift aid or pension payment issues.

Two examples:

One client emailed me recently with a P800T HMRC form, showing a substantial tax refund. “But I have not submitted my tax return yet!” He says. “So is this right?”

He was right to be cautious. HMRC had him in two separate systems:
– self assessment and
– the P800T non self-assessment system.

Had he claimed the promised refund, we would have got in an awful mess. Fortunately he checked with me first, thank goodness.

OR finally, and even worse, take the recent tax tribunal case of S Battu (TC 5303):

Mr Battu was an employee with simple tax affairs, paying tax under PAYE, so why did he have a penalty to pay for not submitting a tax return?

The simple answer is, because he was sent one, and did not fill it in and return it.

HMRC made the mistake; but he suffered. They gave him two tax free personal allowances in error, on a change of job half way through the tax year. They realised, after the event, he owed a lot of tax. Not welcome news to someone who has probably spent his nett pay by now.

HMRC said the taxpayer failed to respond to requests for information, and so sent him a tax return to complete, putting him into the self-assessment system.

One can only suspect that Mr Battu did not have a clue as to the significance of filling in the tax return (leave alone correctly) within the three month deadline. Nevertheless, the Tribunal found against him. He should have taken steps to file the return and repay the tax owning.

And so the bottom line is, PAYE is not a totally safe system. Do not rely on PAYE deducted to be accurate. Things can go wrong in the simplest situations. If in doubt, get help! Or things can only get worse, when they come after you for the arrears, and the penalties.