Extra-statutory Concession A19
Nigel Mills (Amber Valley, Conservative)
It is a pleasure to serve under your chairmanship today, Mr Streeter. I can assure you that we are discussing a tax issue and not a road or an aeroplane, which is probably a relief to the Treasury Minister responding.
Several of my constituents who sought to make use of the A19 concession have expressed concerns after, in their view, being unreasonably denied. For the record, that is the concession whereby if a taxpayer has underpaid tax because the Revenue failed to use information that it was provided with in a timely way, it can agree not to collect that tax from the individual. That is particularly relevant when collecting that tax, which may cover several years, would cause hardship to the individual. The most severe cases I have seen are those involving pensioners who have been presented with a sizeable bill.
I want to raise three aspects this afternoon. The first is how HMRC currently applies concession A19 or, in many cases, does not apply it. Secondly, I wish to ask what an appropriate appeal or review process for those decisions might be. Thirdly, I will say a few brief words about HMRC’s consultation on changing the concession from next year.
The easiest way to illustrate my concern is to talk through the case of one of my constituents. I will not name him for confidentiality reasons, but he had a job working in a factory from 1997. In 2001, he started to receive an occupational pension from a previous job. Everything worked well, and his tax was collected accurately, his employer had a coding notice with his personal allowance, and his pension was taxed at the basic rate.
Everything worked fine for five years until June 2006 when, for reasons unbeknown to the Revenue and certainly to my constituent, it decided to change the tax code for the pension, effectively giving him a personal allowance on two sources of income. That went undetected until February 2011 when, following a reconciliation process, the Revenue sought to collect the tax from my constituent for the previous four tax years—a bill of £5,000.
The Revenue issued the demand to my constituent, and did not think to go after either his employer or the pension fund. I believe that the pay-as-you-earn regulations state that in the first instance the Revenue should go to the employer if it believes that it has misapplied the rules. It would be helpful if the Minister confirmed that that is his understanding of the process. It does not happens often, sadly.
My constituent eventually took advice from a local firm of accountants, which advised him that concession A19 might apply. However, the Revenue rejected that on a couple of occasions, and there is concern about the thoroughness of the review and the fairness of the summation of facts. It rejected the application because its only failing was that it had not reviewed forms P14 and P35 provided by the employer and the pension fund and realised that the personal allowance was being used twice. Its reason was that the purpose of the forms is not to inform the coding notice process, as required by the wording of statutory concession A19.
That logic is bizarre, because the best information that the Revenue receives to decide whether someone is paying the right tax is those two forms, which that all
employers must file within so many days after the year end, and I suspect that that is how the Revenue has reconciled people’s tax affairs manually in the past. I think it now uses the information electronically to make that reconciliation, so I struggle to see much logic in saying that the information about what an employee has earned in a year and what tax they have paid is not relevant to the coding process. That process it is designed to find out what income and benefits someone has had in previous years, and to work out what tax they should pay in the next year and therefore what code they should have. The issue has been raised with the Minister by the Association of Taxation Technicians, the Chartered Institute of Taxation, and the Institute of Chartered Accountants in a letter that they sent him in August.
The Revenue’s other argument was that the taxpayer should have understood that the coding notices were wrong. That is even more bizarre, because it was arguing that my constituent had started his employment in 2005, not 1997, and that his employer had never told the Revenue that he was working for it, so it did not issue any coding notices. That was all complete rubbish, because he had been employed for much longer, and the employer had issued coding notices, which had been applied correctly.
It is strange that in its letter the Revenue said that my constituent should have been able to work out that he was receiving two personal allowances by comparing the one coding notice it thought he had with his payslip or P60. That was surprising. The Minister and I might just about be able to work out how our tax code has been arrived at, and to divide it by 10 and add a random letter at the end depending on whether we owe it money or not, but I suspect that when benefits are added the process is much harder, and it is not easy for an ordinary member of the public to work out what a coding notice means. The explanation of how various adjustments are calculated is not clear, and to expect someone to do that by working back from a tax code that they might spot on their payslip is somewhat unreasonable.
Jim Shannon (Shadow DUP Spokesperson (Health), Shadow DUP Spokesperson (Transport), Shadow DUP Spokesperson (Human Rights); Strangford, DUP)
I thank the hon. Gentleman for highlighting this issue. As an elected representative, I have had to deal with several A19 concessions in the last few years. I have been successful with most of them, but the one thing that keeps coming through is that people are not aware of the concession. Does the he agree that HMRC should publicise it more?
A record is taken of telephone calls and registration in every case, and that should show that people have expressed concern over a period. That helps when someone applies for an A19 concession, and they may receive the concession and a reduction in payments. Some of the people I have dealt with owed £7,000 or more, which we got reduced.
Nigel Mills (Amber Valley, Conservative)
I agree with most of what the hon. Gentleman says, and I will come to some of his points. My constituent was not as lucky as those he helped, because he had no idea that his tax affairs were wrong. He was receiving two sources of income, and tax was being taken from both, so he did not realise that a mistake had been made sometime during the process. One could argue that he should have realised that his income had increased slightly, but the impact was not hugely significant on a weekly or monthly basis.
Such matters are complicated when personal allowances change every year, and recently rightly they have rightly been changed by quite a lot every year. If someone’s income fluctuates because they are working overtime, they might not notice that their weekly pay is £25 different from what it would be if the tax was deducted correctly.
We must be careful about expecting people in this country who do not have to file tax returns, and who do not generally have dealings with the Revenue, to understand what the complicated bits of paper that come through their door mean. If we base a system on relying on people understanding, we must make sure that what they receive is clear and complete, so that they can work through the calculations and understand where they are wrong. That is not the case with the current coding notice.
My constituent’s advisers and I thought that his experience had met all the requirements for an A19 concession. It had continued for several years, and the fault was clearly not his but either his employer’s or, more likely, the Revenue’s because he had been in the same continuous employment for much longer than the Revenue seemed to realise. Even if HMRC thought it was the employer’s fault, it made no effort to make contact that employer while it existed. Sadly, it ceased to exist in mid-2011, about six months after the issue came to light.
To the adviser, it looked as if the Revenue was just refusing to accept an A19 claim based on a new policy that it should resist more such claims. The purpose of the concession is to provide fairness in the system if something goes wrong for an innocent victim. Yes, they should have paid the tax and, yes, they have received money that they should not have had, but if that has gone on for several years there might be severe hardship if they were required to find that money several years later. I suspect that we all believe that that concession is right, and it is important that it is applied consistently and fairly, and that people understand when it should and should not be applied. I am not sure that that is the case now, and perhaps that is why the Revenue has considered redrafting the concession, although there is significant concern that the redrafting will not help the situation much, which I will come to.
If an individual goes to the Revenue and has their request turned down, they have almost nowhere to go. It does not count as a tax assessment in the Revenue’s view, so they cannot appeal through the normal tribunal system. The only option is to make a complaint and go to the adjudicator, but even that is not ideal, as the adjudicator is only allowed to make recommendations to the Revenue that are consistent with the law or its own internal policy. Unfortunately, I do not think that the Revenue has even published all its internal guidance, although I am aware that some freedom of information requests have been made for details of the grounds for refusing A19 claims. It is hard to think that there is much chance of success when someone’s only route can be turned down if it is inconsistent with guidance that they have not actually seen.
Does the Minister have any ideas on how we can end up with a proper independent review of some of these cases? R.E. Clark v. HMRC was a tax case in which Mr Clark tried to make a formal appeal based on the P800 assessment notice that he had received being some kind of informal assessment. Interestingly, at the first
stage, the judge hearing the appeal refused to accept HMRC’s request to dismiss it out of hand. Probably luckily for Mr Clark—although it not so good for us—the case was settled out of court and we did not see how the tribunal would have taken it. This is an issue of fairness. The concession is a policy that we think should exist, and it is important that a clear, impartial review is available, so that when HMRC has perhaps not come to the right answer, a clear resolution can be found.
The final topic I want to raise in the time that I have left is the recent consultation, which was intended make the issue clearer. In some ways, it is possible to become cynical after a few years of doing this; clarity appears to mean that a document goes from being two thirds of a side of paper long to more than three sides. Greater length may make things clearer but it can also add a lot more complexity, ending up with a lot of references that have to be chased around, and I am not sure that that makes things clearer.
The consultation raised a more fundamental concern, which was that the new words seem to restrict the application of A19 in future. It is not just a clarification but a restriction, and it seems to impose a duty on taxpayers to ensure that their tax code is correct and up to date, which implies a continuing duty for people throughout every tax year to ensure that nothing is changed, and that their car benefit has not gone up, or whatever else. That is an onerous position to put people in. We all hope that with real-time information and more regular reconciliations, we will not see the sort of situation that we saw in 2010, when several years were unreconciled. The ongoing reconciliation process has been throwing out errors, and we hope that in a year’s time, when things are done in real time, no more people will face the hardship of getting a multi-year tax demand. However, if we are going to have this thing in place, it needs to be clear and only impose realistic burdens on taxpayers. It is right that we all try to understand our tax affairs and check things that come to us, but where things are complicated and the mistake is the Revenue’s, not ours, we should allow the concession to be in place.
I hope that the Minister will help me and my constituent to understand whether there has been a change of policy by the Revenue in how it handles A19. Has an instruction been sent out centrally? An article in Taxation a few months ago seemed to allege that the instruction was almost, “Thou shalt not agree any of these and if any of you do, you will get some kind of action taken against you.” I suspect that that was a little exaggeration, but it was what the article suggested. It would be helpful if the Minister could give us some data on how many A19 applications have been made in recent tax years and how many have been accepted and rejected. I suspect that he may not have that information to hand, but if he could let me have it in writing, that would be helpful, as it would show whether there has been a trend in the last year or so for a lot fewer of them to be approved.
Finally, will the Minister confirm that what the Revenue should do in PAYE cases is go after the employer first when it is their mistake, and only then going after the taxpayer if they are somehow jointly at fault or if there is some reason why the employer cannot be pursued? Various answers would bring much greater clarity to the situation and help people who get caught in this sort of mess.
David Gauke (The Exchequer Secretary; South West Hertfordshire, Conservative)
It is a great pleasure to serve under your chairmanship again, Mr Streeter, and I congratulate my hon. Friend Nigel Mills on securing the debate. Once again, he is bringing to the attention of the House his knowledge and expertise of the tax system and representing his constituents so well on a number of matters. He does so today with regard to the extra statutory concession A19, and the debate has been helpful. I am grateful for the opportunity to respond, and I hope to be able to address his questions.
Before doing so, it is worth recognising that HMRC has made considerable progress in modernising the PAYE system and bringing the legacy issues for PAYE customers up to date. The national insurance and PAYE computer system—NPS—became operational in early 2010, enabling HRMC to bring all taxpayer records on to a single national database held under unique references. For the first time, HMRC has been able to bring together all sources of income for a customer under one reference. Although I know that there were considerable problems with the implementation of NPS, now that it is fully automated, it is a very cost-effective process that enables HMRC to reconcile nearly 60 million PAYE tax records very quickly.
In October 2010, HMRC’s late chief executive, Dame Lesley Strathie, made a commitment to the Public Accounts Committee, in response to an NAO recommendation, that HMRC would bring PAYE up to date for taxpayers by the end of 2012-13. It is on track to deliver on that commitment and it has already settled 17.9 million unreconciled customer records. As a consequence of those improvements, in the last two years, the number of unexpected tax repayments and demands issued by HMRC has been higher than usual, and in turn, that has led to an unprecedented number of customers contacting HRMC for help and advice. HRMC recognises that on occasions its customer service has fallen short of the standards that it wants to provide. HMRC has taken steps to improve its customer service over the past year—for example, by investing in its contact centres—and it is making customer information more accessible and easier to understand. It recognises, however, that there is more to do, and it is building on this year’s improvements to give all taxpayers the services that they rightly expect.
A significant proportion of the complaints that HMRC has received relate to HRMC’s implementation of ESC A19, and HMRC consulted on the operation of the concession over the summer. It has listened to the views of taxpayers and to comments in the media. Its current operational process was developed in response to the exceptional circumstances of 2010, when steps needed to be taken to ensure that the 166,000 requests that it received could be dealt with quickly. To respond to a question raised by my hon. Friend, from September 2010 to
HMRC looked to deal with those matters as quickly as possible, creating a dedicated team and a streamlined process that included a more relaxed approach to the reasonable belief test during 2010 and 2011. It also raised the collection threshold to £300, and as I said in my statement to the House in January 2011, HMRC would not reconcile the tax affairs of 250,000 pensioners
for whom we believe a request under the concession would have been successful. HMRC recognises that there is much more that it needs to do to improve its implementation of the concession for the future. There is work in progress to deliver process improvements and better guidance for officers dealing with requests, and particularly to improve the service for those customers who will always need help understanding and managing their tax affairs. That work is specifically aimed at reducing the number of customer requests that become formal complaints.
At this point, it may be helpful if I try to respond to some of my hon. Friend’s specific questions. He asked whether HMRC had published all the internal guidance on ESC A19. HMRC has published all guidance except where it considers that publication of the decision-making process that it uses to determine the reasonable belief test would prejudice its application. If HMRC published certain items, all cases would be phrased in a particular way to meet it. That would not be helpful, but that is the only reason why guidance would not be published.
HMRC has not changed its policy on ESC A19. HMRC has been looking to improve its consistency of decision making in these cases. Taxpayers have an appeal route to the Revenue adjudicator if they cannot agree the position directly with HMRC. Perhaps it is worth saying a word or two about that appeal route, which was raised by my hon. Friend. If a claim is refused, the taxpayer can request a second review. The taxpayer can make a formal complaint to HMRC. The taxpayer can then request a review of the formal complaint decision. The taxpayer can ask the adjudicator or ultimately even the parliamentary ombudsman to conduct a review. It is correct to say that there is no statutory right of appeal to the tribunal. That point has been tested with the tribunal, and that was the conclusion reached in that case.
Of course, HRMC has a responsibility to collect the tax correctly prescribed by Parliament. ESC A19 is a concession that applies where HMRC has not acted in a timely or accurate way, but clearly there is not complete flexibility for HMRC to agree not to collect the tax that is due.
My hon. Friend asked whether, in some cases, the matter should be taken to the employer or pension provider first, rather than going to the taxpayer. HMRC has a process that allows it to approach both the employer and the taxpayer at the same time. In the majority of cases, a review under ESC A19 can be conducted quite quickly to establish the nature of the error. HMRC is happy to discuss individual cases with taxpayers if the taxpayer feels that it is their employer who has made the mistake.
Nigel Mills (Amber Valley, Conservative)
Is it not the case that under, I think, PAYE regulation 72, the Revenue should go to the employer first? I think that it can then issue a notice to say that it can go after the taxpayer. In theory, the taxpayer should be sent a copy of that notice. I am not entirely sure that that is the process that is followed very often, but I think that it is the one set out in the regulations.
David Gauke (The Exchequer Secretary; South West Hertfordshire, Conservative)
If I may, I shall come back to that specific point, because I want to deal with another issue raised by my hon. Friend, which was whether the P14 forms could be used for information and why that does not
happen. I just point out that due to the volumes received each year—approximately 60 million—P14 forms are processed over several months. That is an automated process. There is currently no scope within the process that would enable HMRC to identify and amend a tax code for the current year on receipt of the previous year’s P14.
My hon. Friend asked about the ESC A19 consultation. The outcome of that consultation has yet to be decided. Obviously, he will be keen to know what it is. When that has been concluded, I will ensure that he is fully aware of it.
It is right to say that HMRC has delivered a real change in the operation of PAYE and brought its legacy issues up to date. That means that 85% of PAYE customers will have paid the right tax during the year. The remaining 15% will be due a refund or owe tax for a variety of reasons other than HMRC error. Furthermore, the vast majority of customers will be notified of their tax position well before the end of the tax year.
ESC A19 is designed to apply routinely when HMRC has failed to act on information received and also fails to notify the customer of their arrears for a full 12 months after the end of the tax year. This year, HMRC has received significantly fewer requests, and most of those were received immediately following the issue of the tax calculation. The vast majority were not eligible for the concession because there had been notification of the arrears within the 12-month deadline. The occasions on which taxpayers will need to make a request under ESC A19 in the future are significantly diminished. HMRC does not envisage the problems and complaints that arose from its implementation of the concession in the exceptional circumstances of the past two years arising to the same extent in the future.
However, my hon. Friend raises an important point about the difficulty that some taxpayers have when they simply have a tax code. That can make it difficult for them to assess exactly what the right amount of tax to be paid is and, if they are paying the wrong amount, what can be done about it. My hon. Friend will be pleased about the progress that we are making with tax statements. We are making much more information available to taxpayers, so that they can see what tax has been paid. The way I see that developing is that ultimately it should provide a much clearer route—much greater clarity to taxpayers—to ensure that the correct amount of tax has been collected.
Let me return to regulation 72, which my hon. Friend raised a moment or so ago. He is correct about the process. The NPS is fully automated and cost-effective
and deals with 1.5 million underpayment cases per annum without recourse to this process—without going into regulation 72. These cases do not arise only because of employer error. Regulation 72 is really an anti-avoidance measure to prevent collusion between employer and employee. I hope that that provides some clarity to my hon. Friend.
It is important to distinguish between HMRC’s obligation to apologise and provide redress for customers who experience poor service and its collection and management discretions in effect to withdraw tax rightly due from the Consolidated Fund. HMRC has a statutory obligation to collect the right amount of tax from each taxpayer and to be fair to all taxpayers in that respect.
ESC A19 was intended to remedy the hardship and injustice of unexpected demands caused by the then Inland Revenue’s error and delay. Although HMRC’s tax commissioners can forgo tax in cases of financial hardship, its discretions to forgo tax that is rightly due are limited and are certainly restricted to the strict application of the conditions of the concession.
Compensation payments to remedy the cost and distress of poor service are ex gratia and are applied using the guidelines in the “Managing Public Money” rulebook. Those must not allow recipients to gain financial advantage as a result of poor customer service. It would be acting outside the parameters of the authority delegated to HMRC to provide redress that clearly linked someone’s tax liability with the amount of their compensation. To be fair, HMRC does have to operate a difficult balance.
We must recognise that the complaints and problems that we have heard about today, although serious and distressing for the individuals involved, have arisen in exceptional circumstances. HMRC has recognised and apologised for poor service and is taking steps to put things right for the future, particularly for pensioners and other vulnerable customers. It is working closely with professional organisations and charities to understand customer needs and improve services.
The need for customers to turn to ESC A19 for redress in response to an unexpected tax demand is diminishing. I would like to reassure my hon. Friend that HMRC will compensate customers for poor service, using its authority within “Managing Public Money” rules, and use its collection and management discretions to forgo tax where that is appropriate and necessary and where it has the power to do so.
Question put and agreed to.