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HMRC Software Errors Affect 2016/17 Tax Returns

29 March 2017 No Comment

HMRC have incorrectly calculated a series of 2016/17 tax liabilities, and in mid 2016 they sent incorrect sample calculations to software houses. As a result, the software houses have been compelled to write those inaccuracies into their 2016/17 tax return packages.

HMRC were notified of this problem in November 2016. I first learnt of it in January 2017, and now it transpires (on 29 March 2017) that HMRC have not been able to rewrite their internal software in time for the 2016/17 tax return filing season! And, that means that the software houses are being required to ship 2016/17 tax return software which they know is inaccurate.

You can’t make this stuff up can you?

This is a mission critical Government body that is incapable of doing tax calculations properly and preparing tax ready software! And next year, they’re imposing the new “Making Tax Digital” rules on all of us. Who knows what else could go wrong?

The problem for 2016/17 arises because tax law is now so complex, and HMRC has failed to get to grips with the interaction of the “savings allowance of £1,000” and the “dividend allowance of £5,000” and the “personal allowance of £11,000” and the “additional rate of tax on income over £150,000”.

The complexity of the interaction between these allowances gives rise to certain combinations of income (and these are not unusual combinations) where the taxpayer can elect to allocate the allowances in the most beneficial way. For example, a combination of small salary and big dividend is enough to create problems for many taxpayers.

It goes like this:

  • Scenario 1 – If your total income is more that X, and your earned income is between Y and Z then you’re caught.
  • Scenario 2 – If your total income is more that A, and your dividend income is between B and C then you’re caught.

What’s the solution? HMRC’s official instructions are to file paper tax returns for taxpayers who fall into these groups and not to use online filing! Yes! Seriously! They want paper tax returns by 31 October 2017 for these cases. They’ve not explained what accountants (and taxpayers) should do if they work the records just before the 31 January 2018 filing deadline (for electronic returns), and then discover that one of these two scenarios is an issue. Then you’ll need a time machine to go back to October and get your paper tax return submitted on time.

It’s not the fault of the software houses, it’s HMRC’s fault! The software houses spotted the errors last year. And, the software houses could rewrite their own software now and get it right. However, if HMRC don’t change their internal software, things will go horribly wrong. These software houses are required to produce tax return software which abides by the sample calculations set by HMRC. If their software doesn’t follow HMRC’s computational rules, then the tax return will be rejected by HMRC’s system.

One alternative is to use the software to submit a tax return with an incorrect calculation and pay more tax than you have to! “Couldn’t we just do that, and file the tax return electronically, and then just pay what we think is the right tax” I hear you ask? Theoretically “yes” and then you’ll have a battle to fight with both the Inspector of Taxes (ah, but you self assessed and you chose that allocation of allowances) and with the Collector of Taxes (ah, but you must pay what you said in your self assessment).

You don’t want to go down the route of arguing with HMRC. It’s hellish, time consuming, soul destroying stuff and we regularly have to deal with that. Sometimes it seems like half our working week is consumed by us trying to get HMRC to do their job properly!

The second alternative is to file on paper after the 31 October 2017 deadline and get an automatic £100 late filing penalty!

We’re all going to be filing on paper for 2016/17. And we’re all going to be doing that before the 31 October 2017 deadline. At Proactive we won’t know if your income fits Scenario 1 or Scenario 2 until after you give us your records. And we’re not going to risk getting cases like these arising after 31 October 2017.

And “no” we’re not going to state the values of A, B, and C, and X, Y and Z because half of you will say “ah, well I’m OK then” when you could quite easily have overlooked something. Don’t laugh! It happens far more often than you realise! You will need to help us to get your paper tax return done before 31 October 2017 or you will need to find a different accountant.

That may seem draconian, but it’s the only way to guarantee that everything is done correctly, is done uniformly, and is done on time. It’s a bit like “always comply with the speed limit and you’ll never have to pay a speeding fine”. Guaranteed! Safe! Put it in your diary now, please let us have your records by July 2017 at the latest!