HMRC's operation of the PAYE system - Treasury Contents

Letter from Dame Lesley Strathie DCB, Chief Executive, HM Revenue and Customs, to the Chairman of the Committee


  Following my recent appearance at the Treasury Select Committee on 15 September I am writing to let you know about our work to reconcile PAYE cases for the years 2008-09 and 2009-10. This is a normal part of the PAYE process, but this is the first time we are doing the reconciliation using the new National Insurance and PAYE Service (NPS) IT system, and we are doing two years at once as we were unable to do it last year. The overwhelming majority of PAYE customers have paid the right amount of tax, so their accounts will reconcile as balanced when we run this process. But for a minority there will be an over or underpayment which we must now put right.

At the start of September, we tested the process using 475,000 customer records which produced underpayment notices for some 11,000 customers, and overpayments for around 42,000. The objective of this exercise was two-fold: to act as a final test of the IT in the live environment, and to assess our operational readiness to deal with the customer response.

You will be aware that there was a huge response in the media to our decision to send out these notices, much of it focussing on the underpayments, and suggesting that it was all down to HMRC error. This is not the case—underpayments and overpayments arise for a variety of reasons, often linked to a change in a customer's circumstances during the year (for example, changing jobs, receiving a new benefit in kind—such as a car—receiving a new source of income). As a result a minority of customers will find that they have paid too much or too little tax at the end of the year.

  I am pleased to report that the test was successful. We are confident that the system is in as good a shape as it can be. Our analysis indicates that we have a 95% confidence of an error rate of 2% or less. Contact volumes have been within our forecast range, and many customers have been able to get the information they needed (especially those chasing refunds) by listening to our recorded message service.

  As a result I am satisfied that we are now in a position to move to full live running of the EOYR process, and I have agreed it should start from 1 October. We expect to issue around 90,000 notices a day and hope to have completed the bulk of this exercise before Christmas.

  Our forecast is that, in total, around 4.3 million taxpayers will receive repayments, while an estimated 1.4 million will be sent letters telling them that they have underpaid along with an explanation of the calculation and how it can be reviewed. The total underpayments are worth about £2 billion while the overpayments are worth about £1.8 billion.

  We have put in place a number of measures to ensure that we maintain effective levels of customer service during what will be a very busy time. These include improvements to the explanatory notes accompanying the notices, and new guidance on the internet. You will also recall that the Commissioners took the decision not to collect smaller underpayments of tax and increased the tolerance level for underpayments to £300.

1 October 2010

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