A Pig's Breakfast

Earlier this month I wrote:

"HMRC's plans for revamping PAYE, aka "The Centralised Deduction Plan", which in theory would give HMRC real time information from companies about income and deductions as a platform for centralising the calculation and deduction of tax, NIC and student loan repayments, have come in for some criticism.

Aside from the deep routed scepticism about HMRC actually being able to create an IT system that could do this, tax professionals also note that the plan would move the responsibility for undertaking the calculation away from employers and place it fully with HMRC."

Those who profess that this is a good idea may care to flip through the report by the Comptroller and Auditor General into HMRC's 2009/10 accounts.

John Stokdyk of Accounting Web has done the leg work and notes:

"The scale of HMRC's difficulties in introducing a new system to manage PAYE codes has emerged in an appendix to the department's 2009-10 accounts.

A report prepared by the Comptroller and Auditor General to accompany the annual HMRC accounts (2.7MB PDF) devotes several pages to the problem, and estimates that if 18.2m unresolved 'open' cases are taken into account, a net figure of £1.6bn in repayments may still be outstanding going back to 2007-08 and preceding tax years....

The problems with the PAYE system have been evident for years, and paved the way for a major overhaul to standardise numerous separate systems into a single database for employee records.

The National Insurance and PAYE Service (NPS) went live in a phased implementation that started in June 2009, more than two years’ behind schedule. The decision to delay the project was made to protect the integrity of the PAYE system, but built up a huge backlog of PAYE returns in 2007-08 and 08-09.

The deferral cost the department an extra £33m and prevented it from realising some £55m of planned efficiency savings during 2008-09 and 2009-10. Further changes, including improved security measures, added a further £78m to the cost of the project. Based on its revised figures, HMRC expects to save around £532m over five years, and to recover its investment of £389m by 2013.

In spite of introducing the new system, PAYE processing errors increased in 2009-10, amounting to £132m in underpayments (a 15.7% increase) and £238m in overpayments (a 148% increase). The department discovered that going live with a high volume computer system that wasn’t adequately scoped or tested was a sure way to foul things up even more.

Before migrating 54.3m live taxpayer records from 12 regional databases into 45.4m employment records on the new database in June 2009, HMRC neglected to validate the integrity of the information, assuming that its new exception processes would be able to correct inaccuracies as the system received new data from employers.

'Evidence from the initial operation of the new Service suggests that the Department did not fully appreciate the extent of risk from data inaccuracies or its implications for the delivery of PAYE,' observed the NAO report.

The capability to reconcile many of these discrepancies within the new system was not available until the third phase of the project in April 2010, which meant that more than 7m over- and underpayments were unreconciled when it came to run the 2010-11 annual coding exercise. These records will now be processed from August 2010, although it is not yet clear how many cases will clear automatically and how many will be left for manual working.

When the new system encountered an employee that it could not match to existing employment data, it automatically generated a new, erroneous employment record. So many new items were appearing that when HMRC processed 2008-09 data on the system, it exceeded its 12.5m capacity for open items. The 7m work items arising from 2008-09 returns had to be removed from the workflow queue rescheduled for processing in August 2010.

'The Department found that the new service had produced significantly more amended tax codes than expected, with the potential to generate up to 25.8 million coding notices, almost double the amount anticipated. A significant number of the codes generated were incorrect.'

While its computer was churning out coding notices, HMRC only really became aware of the problem as the volume of calls mounted to its contact centres – which peaked at more than 18,000 calls per day about erroneous coding notices.

In January 2010 HMRC put in place a recovery programme to identify and prevent the issue of any further incorrect coding notices to individuals and ensure that corrected coding notices were issued to employers in time for the 2010-11 tax year. At its peak, the department assigned a total of 3,000 staff to the project, including 2,400 who were switched from their usual work supporting personal tax customers.

At the end of June 2010, estimated a further 2m records were at risk and needed review and will begin bulk processing of 2008-09 reconciliation this month."

Two questions from this now arise:

1 Are HMRC capable of, or indeed should be trusted with, setting up a real time PAYE system?

2 Were they to set up the real time system, the current system with its flaws and extensive ongoing work on corrective actions, would become redundant. Exactly what would have been the point of introducing the new system only to bin it?

A pig's breakfast by anyone's standards!

Tax does have to be taxing.

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