Who Pays the Bill if HMRC Make a Mistake? | The Accountancy Partnership (2024)

Whether you’re a sole trader, limited company, or you co-ordinate the payroll, 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.

Do HMRC really make mistakes?

HMRC tax overpayments and underpayments

Why do HMRC have the wrong information?

What happens if an employer makes a mistake with tax?

Can I challenge an HMRC decision?

How do I protect myself from HMRC errors?

Do HMRC really make mistakes?

Absolutely! Some mistakes are more common than others, but 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. If HMRC determine that you’ve paid too much tax for whatever reason, they will contact you to arrange a refund.

When HMRC think you haven’t paid enough they’ll send you a further bill called a Simple Assessment Letter (P800) to raise the issue.

Inaccurate or out-of-date records can easily lead to tax miscalculations.

If HMRC do need to issue a tax rebate, then 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.

HMRC might sometimes issue a penalty though they will reverse this if you can prove that they’ve made a mistake. If this is the case they’ll 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.

Why do HMRC have the wrong information?

This could be as a result of anything from a new employee going on the wrong tax code because they made a mistake supplying their details, to a company director forgetting about their pension.

There can be any number of reasons, but they do reinforce the importance of meticulous record keeping. Having clear, accurate records will make it much easier to cross-reference your data against HMRC, and unpick any issues.

What happens if an employer makes a mistake with tax?

The process of running a payroll can be a headache and the more employees you have, the more complex your payroll will be – and the higher the chance of an employer making a mistake with PAYE.

Ideally your employees will let you or your payroll department know if any of their details need updating, but sending reminders for them to check the data you hold might help. Encourage them (a lot) to check their payslip every time they receive one.

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.

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.

Responding directly to HMRC is the best way forward, and 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? Is your P11D statement accurate if you receive benefits in kind?

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 should!) contact HMRC if you think there’s been a mistake, although you’ll normally need evidence. They’ll work with you to try and resolve the issue, although getting hold of them in the first place can be famously difficult.

Call waiting times tend to be lengthy, especially at certain times of the year such as around tax deadlines. If you have an accountant or agent to represent you, get them on the case straight away!

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)
• Class 4 National Insurance contributions
• Capital Gains Tax

See the Gov.uk webpage ‘If HMRC did not act on information they were given’ for more details.

Otherwise, your best option is to contact HMRC to discuss the issue with them 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.

How do I protect myself from HMRC errors?

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, and always notify them of any changes, such as a new pension provider.

It’s also essential that you 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.

Even without evidence of any errors HMRC will sometimes carry out spot checks. It can feel pretty stressful, especially if it comes out of the blue, so don’t be afraid to ask for help. 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.

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