HMRC reach conclusion on 2016/17 tax errors – 30,000 individuals potentially affected

HMRC are to undertake a detailed review of around 30,000 Self Assessment tax returns submitted for the 2016/17 tax year and some individuals could find themselves with extra tax to pay.

Each year, HMRC publishes a list of Self Assessment online filing ‘exclusions’. Where an exclusion applies, HMRC’s tax calculators are unable to calculate the correct level of tax due by a taxpayer for the year. The taxpayer is therefore required to submit a paper tax return in these instances to ensure tax is calculated correctly.

The introduction of the savings and dividend allowances from 6 April 2016 led to a significant number of problems in HMRC’s Self Assessment tax calculators. In tax years prior to 2016/17, it had always been beneficial to allocate the tax-free personal allowance against non-savings income in priority to other income. However, from 2016/17 it is no longer quite so straightforward as a result of the new allowances being available, with it being more beneficial in some circumstances to allocate firstly against savings income or dividends instead. This has given rise to many added complexities in the tax computation and HMRC’s tax calculators are simply unable to adequately deal with all of these. A spike in the number of online filing exclusions is the result.

Unfortunately, not all tax returns where exclusions apply are prevented from being filed online. There are therefore individuals who, unbeknown to themselves, have submitted their returns showing the incorrect level of tax due. In light of the large number of exclusions which were in force for 2016/17, HMRC have undertaken a review of all tax returns submitted to identify affected cases. They say that all such cases have now been identified and, from 19 November 2018, they will begin the process of reviewing and amending these.  The number of returns affected is thought to be in the region of 30,000, however, HMRC believe that only around half of these will actually require amendment following a more detailed review.

Where it is found that an update is required, HMRC will issue an amended tax calculation to the relevant individual. The taxpayer will subsequently have 28 days to settle any underpaid tax to avoid interest and penalty charges. In addition, any subsequent amendments the individual wishes to make to the tax return will need to be submitted to HMRC on paper rather than online.

But it shouldn’t all be bad news – some of the errors in the tax calculations actually resulted in more tax being charged. The expectation would therefore be that some taxpayers will, in fact, receive a refund.

HMRC have now corrected their calculators to remove many exclusions which applied for the 2016/17 tax year. Unfortunately, there are a number of exclusions still in play for the 2017/18 tax year. HMRC do not intend to correct any of these ahead of the 31 January 2019 online filing deadline. It is therefore safe to assume that HMRC will undertake a similar exercise later next year to identify incorrect tax calculations for 2017/18.

Given the extreme complexity of the UK tax system which shows little sign of becoming much simpler, there are constantly new challenges for the HMRC calculators to deal with, and it is not clear how well they will cope in the coming years. It will be interesting to see how HMRC’s calculators will cope with the recent introduction of the new Scottish tax rates when the 2018/19 tax return season commences in April…

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