PAC tells HMRC to get its PAYE system in order by 2012

HM Revenue & Customs (HMRC) has been severely criticised by a Commons watchdog committee for the "flawed implementation" of its new National Insurance and PAYE Service (NPS) computer system.

Public Accounts Committee chair Margaret Hodge complained it had "failed in its duty to process PAYE accurately and on time" and deliberately left taxpayers in the dark until last September about problems with the new system. The system has been designed to bring all of an individual's pay and tax details into a single record.

In theory it should increase the accuracy of tax codes and reduce the underpayment or overpayment of tax.

The botched implementation led to the PAYE reconciliation fiascos of 2008-09, 2007-08 and earlier years, which left an estimated £2bn of tax underpaid and £3bn overpaid.

The debacle affected some 15 million taxpayers, and a failure to understand the impact of the Finance Act 2008 on the deadlines for collecting tax means HMRC is unable to collect £650m, the total estimated underpayment for 2006-07 and 2004-05.

Hodge said: "HMRC's mismanagement has caused uncertainty and worry to taxpayers and inequity in the system. We now 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."

The committee's report said the "flawed implementation" of the NPS had resulted in long and costly losses and "unacceptable uncertainty and inconvenience" to taxpayers and warned that "data quality issues" had further disrupted the issue of tax codes for 2010-11.

The report revealed HMRC began issuing 25 million coding notices for 2010-11 without first establishing why the number was massively in excess of its forecast, then stopped.

It had failed to understand the risks of poor quality data, which undermined the effective operation of NPS.

There are 10 million cases outstanding where there are data quality issues requiring technical or manual intervention.

The department has launched a programme to stabilise the NPS by 2012.