PAYE93145 - taxpayer end of year: reviewing liability at year end: tolerances

When you review a case you should consider the tolerances before you take any action
The remainder of this subject is presented as follows

Underpayments due to PAYE rounding and informal tax calculations

Informal tax calculation already issued

Applying tolerances where several years are cleared together

Over repayment of tax / supplement

Underpayments due to PAYE rounding and informal tax calculations

Detailed information and instructions on underpayments can be found at PAYE90000 onwards. There are however occasions where a small underpayment occurs (usually because of PAYE rounding). In these circumstances we do not issue an informal tax calculation or collect the underpayment as a matter of course, and the COP system is likely to have cleared these cases ‘Z’. The taxpayer can always ask for repayment or an informal tax calculation.

You do not need to advise the taxpayer of an underpayment that is within the tolerance unless

• The taxpayer has requested a calculation, or
• You are issuing a notice of coding, form P2, advising the taxpayer that their code has been reduced onto a Week 1 / Month 1 basis and that the underpayment which has arisen because of this, is to be recovered by a restriction in next years coding

Where the customer asks for a calculation and the record has been cleared ‘Z’ you should write to the customer and explain that

• The tax due approximately equals the tax paid
• We do not normally issue a calculation in these circumstances
• If a calculation were to be issued, it would be likely to show a small underpayment because the operation of PAYE includes rounding in the employee’s / pensioner’s favour which is then lost when a calculation is made, and
• We can issue a calculation if the customer still requests this, but any resulting underpayment (however small) will be collected, usually through the tax code in the next year

The letter should not include a calculation as the calculation has been made by the system and it is inefficient to do this again

Where however, enquiries have been made of the customer or the customer is aware that we are trying to settle a liability, then the calculation must include the underpayment.

Informal tax calculation already issued

In cases where we have already issued an informal tax calculation, but further information is then provided and we need to revise the calculation, then any underpayment, however small, should be collected.

Applying tolerances where several years are cleared together

Generally the tolerances must be applied to each individual year. If each year had been reviewed at the correct time, that year would have been cleared ‘Z’ if the underpayment or overpayment were within the tolerances. You should apply the tolerances to the earliest year first of all, and if the under / overpayment is within the tolerances, then that year should be cleared ‘Z’ and the tolerances then applied to the following year and so on. You must not bring forward any underpayment from earlier years to reduce the amount of any repayment.

Where there is an overpayment greater than the tolerance for an earlier year, but an underpayment that is within the tolerance, on it’s own, without taking into account the overpayment for the earlier year, the later year should be cleared ‘Z’ and the earlier year repaid with any appropriate supplement.

Both years should be cleared ‘Z’ and an appropriate ENOTE made on the COP record where there is an overpayment for an earlier year, and an underpayment for a later year that is

• Greater than the tolerance without taking the earlier overpayment into account, but
• Within the tolerance if the overpayment (and supplement) is (are) brought forward

Where an underpayment for an earlier year is brought forward to a later year reducing any overpayment for that later year to within the tolerances you should clear both years ‘Z’ and not issue tax calculations.

Over repayment of tax / supplement

Where there is an over repayment of tax / supplement, and the resulting over repayment is less than the current tolerance, the tolerance should be applied and no further action should be taken to recover the underpayment.

Where we have already issued an informal calculation for an underpayment case and we find that there is a further underpayment, that further underpayment should be notified and collected regardless of the amount, (unless we consider that Revenue Delay, Extra Statutory Concession A19 would apply).