Software glitch costs tax office millions in lost revenue

Mismanagement and incompetence at the government department responsible for collecting tax left millions of people facing "uncertainty and worry" over their bills, MPs have warned.

Problems with introducing a computer system resulted in the loss of millions of pounds in revenue and left many taxpayers facing surprise tax demands, the Public Accounts Committee (PAC) found.

The report also revealed that HM Revenue and Customs (HMRC) re-employed its acting chief information officer on a three-month contract, equivalent to £600,000 a year and four times his previous salary, after it was unable to get his successor in place in time. The disclosure, a senior member of the PAC said, "spoke volumes" about the failures of the organisation.

The MPs' report, which comes as the deadline passed last night for people to send in their tax returns, found the authority knew 7 million people had overpaid or underpaid tax in 2008-09 by December 2009. But it did not start telling individuals until September last year due to problems with software used by its new National Insurance and PAYE Service (NPS).

HMRC also failed to tackle a massive backlog of PAYE payment corrections from 2007-08 and earlier, which affected some 15 million people. It is estimated that £1.4bn of tax had been underpaid and £3bn overpaid, although the exact figures are still not known. "As a result of its mismanagement of PAYE processing, the department has not collected tax due from some individuals and has taken too much from others, causing both uncertainty and inequity in the system," MPs said.

The tax authority was also rebuked for increasing the threshold for the recovery of underpayments from £50 to £300 for 2008-09 and 2009-10, forgoing £160m in revenue in an effort to reduce its workload.

"This is inconsistent with the £50 threshold for those taxpayers underpaying in other years, and with, for example, tax credits debtors who do not automatically have debts under £300 written off," the committee said.

Margaret Hodge, the PAC chairwoman, said: "HMRC's mismanagement has caused uncertainty and worry to taxpayers and inequity in the system. We look to the department to be able to demonstrate clearly by the end of 2011 that NPS can process PAYE promptly, accurately and efficiently. Taxpayer confidence must be restored."