I pay tax under PAYE as an employee or as a pensioner. There has been a
mistake with my tax code. HM Revenue and Customs has now sent me a bill for
arrears of tax. What can I do?
The main remedy available where there are unexpected arrears of tax at a time when
you could reasonably have thought your affairs were in order is Extra Statutory
Concession A19. The text of this is shown below, together with a link to the HM
Revenue and Customs website where the issue is covered in more detail.
In outline, HM Revenue and Customs can be asked to give up arrears of tax where
they have delayed in using information about a taxpayer, and it was reasonable for the
taxpayer to believe that his or her affairs were in order. But in law you are liable to
pay the tax that is due. It is only by concession, and not by legal right, that HMRC
may agree not to pursue (some or all) of the tax in certain cases.
Delays
The normal ‘delay period’ is 12 months from the end of the tax year in which HM
Revenue and Customs first had notice of the issue.
If there has been an error in a PAYE coding, perhaps because an employee has two or
more jobs, or a pensioner has more than one pension, then HMRC would normally
become aware of this after the end of the tax year when the P60 forms are issued and
employer’s returns are made.
Example:
John took early retirement at age 62. He got a part-time job to supplement two small
occupational pensions. As all his income is taxed under PAYE John thinks all his tax
is paid. He started part-time work in December 2006. HMRC wrote to him in May
2008 to say that he has underpaid tax for 2006/07. This is because he was incorrectly
given a full personal allowance against his part-time work, when the ‘tax free’
amount of his personal allowance was already being used against his pension income.
The delay: HMRC should, at the latest, have become aware of the problem in May /
June 2007, when the employer’s returns for 2006/07 were submitted. According to the
concession, it then has 12 months from the end of the tax year to notify the taxpayer.
Notification happened during the tax year 2007/08, therefore HMRC has 12 months
from 5 April 2008, viz until 5 April 2009 in which to tell the taxpayer of the problem.
In John’s case, HMRC would normally need to delay until after 5 April 2009 for ESC
A19 to apply; unless arrears have been allowed to accumulate over more than 2
complete tax years. Alternatively, in some cases there may be evidence that HMRC
would have know about the error earlier.
Reasonable belief
It is not sufficient for the taxpayer to have believed that his or her affairs were in
order. HMRC must consider that it was reasonable for the taxpayer to believe this.
HMRC expects taxpayers to take a reasonable amount of care; this includes checking
PAYE codes. Where a taxpayer has been given the basic personal allowance twice
HMRC is likely to suggest that it was reasonable to expect the taxpayer to notice this
and query the position.
Factors which HMRC will take into account when deciding if it was reasonable for
the taxpayer to believe that the position was correct include:
a) The size of the arrears
b) The information available to the taxpayer – such as notices of coding
c) The possibility of misleading advice or complexity introduced by HMRC
d) Personal issues to do with the taxpayer such as their age and state of health,
whether they have a tax adviser, their level of income etc.
What you should do
If you think that the concession applies to your circumstances you should write to the
tax office which has notified you of the underpayment. You do not specifically need
to mention ESC A19, but you should ask HMRC to give up the tax on the basis of
delays. You should also set out why you consider it was reasonable for you to think
your tax affairs were up to date – such as, for example:
o You did not receive a notice of coding
o You phoned HMRC and were told the codes were correct
o The code is complex, or there have been numerous changes
If repaying the sum will cause you significant hardship, or the delays mean that you
are no-longer working and in a position to repay, this is worth highlighting.
If HMRC does not accept your request at first application, check to see if their reply
deals with all the information you provided. If not, it can be worth a second try –
perhaps marked as a complaint.
Text of the concession
Extra Statutory Concession A19
Arrears of income tax and capital gains tax may be given up if they result from the
failure of HMRC to make proper and timely use of information supplied by

a taxpayer about his or her own income, gains or personal circumstances
or

an employer, if the information affects a taxpayer's coding
or

the Department for Work and Pensions (DWP), about a taxpayer's state
retirement, disability or widow's pension.
Tax will normally be given up only if the taxpayer

could reasonably have believed that his or her tax affairs were in order
and

was notified of the arrears more than 12 months after the end of the tax year in
which HMRC received the information indicating that more tax was due
or

was notified of an over-repayment after the end of the tax year following the
year in which the repayment was made.
In exceptional circumstances arrears of tax notified 12 months or less after the end of
the relevant tax year may be given up if HMRC

failed more than once to make proper use of the facts they had been given
about one source of income

allowed the arrears to build up over two whole tax years in succession by
failing to make proper and timely use of information they had been given’
Further information
There is more information on this subject in the PAYE manual at http://www.hmrc.gov.uk/manuals/pommanual/PAYE95000.htm