Whether you’re a sole trader, limited company, or payroll co-ordinator, even the smallest mistake can have big consequences with HMRC.
We all worry about making a tax error – but HRMC itself has been known to mess up too. It’s how (and when) the mistake is corrected that really matters.
Does HMRC really make mistakes?
Absolutely! Some mistakes are more common than others, though. HMRC are as keen as the rest of us when it comes to avoiding costly errors, so they do try to remain open and transparent.
There’s a very specific complaints process you can go through, so if they do make mistake then you shouldn’t end up out of pocket. But one thing’s for sure – no matter whose fault it is, if you underpay tax then HMRC will take action to recover it.
HMRC tax overpayments and underpayments
This is the most common thing HMRC gets wrong – but it can also be costly for you.
Tax overpayments and underpayments are often a result of inaccurate tax records. If records aren’t up to date or contain errors, it can easily lead to tax miscalculations.
If HMRC do need to issue a tax rebate, it’s not unheard of for it to be for the wrong amount. It may be too low or too high – either way, it’s your responsibility to double check.
For businesses, most HMRC inaccuracies take place around pay and deductions, employee start/leaving dates, employee payment dates and National Insurance problems. For sole traders and individuals, it’s often things like Self Assessment payments and pension issues.
Outdated, incorrect or non-authorised PAYE tax codes
Again, this is more aimed at businesses. Inaccuracies in employee information, such as the wrong tax code, can also lead to HMRC making a mistake.
Computer says no
HMRC is a business like any other, and so will need to update, patch, and change their IT systems periodically. Plus, of course, there’s always simple human error. Both of these can lead to tax errors.
The trouble with PAYE
Pay-as-you-earn (PAYE) is another area where HMRC mistakes are more likely. To help prevent any errors before they occur, it’s well worth anticipating and preparing as much as possible.
Missing paperwork (such as a P45 from the previous employer, P45U, or P45ESA) or not properly declaring additional sources of income can throw out calculations completely.
HMRC will often give ‘operational error’ as the reason for most tax-related mistakes, and encourage both businesses and individuals to review and verify their tax calculations regularly.
What happens if an employer has made a tax mistake?
For businesses, running a payroll can be a headache. And of course, the more employees you have, the more complex your payroll will be – and the higher the chance of an employer making PAYE mistakes.
Ideally your employees will let you or your payroll department know if any of their details need updating. Sending reminders for them to check the data you hold might help. It’s also important they check their payslip, and let you know if you overpay them!
Even if you make a mistake, HMRC will approach your employee directly if they need to collect underpaid tax.
Sometimes HMRC’s PAYE system can get confused where an employee has multiple jobs or pensions. It’s not super common, but it can happen.
HMRC might sometimes issue penalties, though they will reverse this process if you can prove that HMRC made a miscalculation. In this case, HMRC will also refund any money owed to the business, usually via a reduction on the next bill. If the error occurs between tax years, then the mistake can be corrected on the next tax return.
What should I do if my employee is contacted by HMRC?
Trying to work out whether it’s an employee or payroll error, or a mistake by HMRC, can be tricky. Wherever along the line the mistake occurred, it’s usually the employee who HMRC contacts first.
Your employee will need to be honest if the information they give you is wrong, or if they’ve been ‘moonlighting’ outside of their contract. Where this is the case, any amounts due, plus penalties, will need to be paid to HMRC by the employee.
Whether it’s an HMRC PAYE mistake, or a tax refund mistake, responding directly to HMRC is the best way forward. Both you and your employee will need to go through and assess the bill and any calculations, and attempt to work out where the figures initially came from. Then you’ll be able to decide the next course of action.
What if I receive an unexpected HMRC bill or letter?
Whether you’re an employee or you’re self-employed, if you receive an unexpected tax bill then you need to review its accuracy. For example, if you’re employed (or were recently employed) does your P45 or P60 match the information on your payslips? If you receive benefits in kind, is your P11D statement accurate?
You should also check any allowances or reliefs to make sure you’re claiming them correctly and that the calculations are as expected.
Can I challenge an HMRC decision?
Yes, you can. And if you feel they’re wrong, then you should contact them – with evidence.
Challenging HMRC will then involve going through a formal process. HMRC are fairly well known for their transparency, but getting hold of them in the first place can be difficult.
Call waiting times can be lengthy, especially at certain times of the year, such as around tax deadlines. If you have an accountant or another agent, get them on the case straight away!
Yep! The best way to protect yourself from any tax queries and mistakes is to check everything you submit to HMRC thoroughly. Keep your details up to date with your employer and pension provider, as well as any other relevant bodies.
Don’t forget to keep evidence too. This means all your tax returns, receipts, bank statements, and anything else that can back up your claims if you need to.
The fact is, HMRC can investigate as far back as 20 years if they think a serious underpayment problem has occurred. Usually, HMRC will investigate any innocent errors from up to 4 years ago, and careless tax returns up to 6 years ago.
What it means in practice
You can ask HMRC to cancel tax you owe if you think they’ve made a mistake because of both of the following:
There was a delay in HMRC asking you for the tax
They did not act on information they had
You can do this by asking HMRC to write off the tax under an extra-statutory concession (ESC A19) if you owe:
Income Tax (for example, if you were on the wrong tax code)
Otherwise, your best option is to contact HMRC to discuss the issue with them. We strongly recommend you do it this as soon as possible – burying your head in the sand really isn’t an option.
One way or the other, HMRC will reclaim any tax you lawfully owe them, so you definitely don’t want any fines or interest on top.
I’m not sure about tackling this alone – who can I turn to for help?
The fact is mistakes happen. And even where there are no mistakes, every so often HMRC will carry out spot checks. Sometimes, where a large rebate is due, HMRC will also want to undertake an investigation before they send the money. And frankly that isn’t exactly unreasonable.
An HMRC investigation can be pretty stressful, especially if it comes out of the blue. A good accountant will work with you to put your case together (regardless of who’s at fault) and guide you through the steps to take next.
They will also liaise with HMRC to make sure that everything is correct in future. This includes claiming all your expenses correctly and ensuring accurate accounting. Where any changes do need to be made, your accountant will essentially help to minimise any negative impact on you.
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About The Author
I'm an AAT and ACA qualified Chartered Accountant with over 13 years experience working with businesses, contractors and sole traders. I also love watching live music, and quizzes!
Learn more about Dean.