The normal collection of tax revenue and balancing the government's books was hit by IT- related difficulties over the spring and summer.
The problems are in addition to the difficulties HM Revenue and Customs (HMRC) faces with tax credits, which are highlighted in this week's National Audit Office's annual audit of the organisation.
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The difficulties raise questions about the government's plans to encourage many more companies and individuals to file returns online. Experts question whether staff and ageing systems can cope with the increasing workloads.
A series of memos issued internally by HMRC and leaked to Computer Weekly show that the IT difficulties and delays in processing annual returns have led to enforcement action to recover tax being held up and receipts of income to the government being affected. They also say that:
lRemedial action has had to take place on a range of IT systems after information was incorrectly posted onto tax and national insurance systems
lThe full processing of PAYE tax returns sent via the internet began four months late, on 10 August 2005 instead of April
lIncorrect penalties and duplicated underpayment notices have been issued
lTax officials are having to contact employers to find out their latest tax position.
Some of the difficulties have prompted members of leading UK accountancy organisations to collectively criticise as a "debacle" HMRC's online PAYE systems and arrangements.
In a report they said, "Many employers and agents might well have been financially better served if they had filed on paper."
But a spokesman for the Revenue indicated last week that some of the problems were in the past. "All our systems are currently working normally. In fact, our service levels are the highest they have ever been, delivering high-quality service to our customers," he said.
The spokesman said the figures to date "do not suggest there has been any significant impact on cash flow" as a result of some processing delays.
The scale of the challenges facing the department can be seen from its board reports and the leaked memos. In July, the board report said, "HMRC is running a number of difficult projects which are placing strain both on IMS [information and management systems] and capacity generally."
The board also noted, in a discussion about gaining an overview of HMRC's performance, that it was "still struggling to get a consistent set of management information".
One of the leaked e-mails referred to the need to "stop any end-of-year reconciliation work" on taxpayer records. It added that information that had been posted incorrectly onto tax and national insurance systems and although this had been fixed, "recovery action is taking place on all our IT systems".
The HMRC spokesman said the systems were now working normally.
Another e-mail to HMRC area directors, tax credit office managers and national insurance managers advises them "what to say to customers about delays in processing employer's annual returns".
But the advice, dated 16 September, gives no scope to staff and managers to admit there have been hold-ups in processing returns because of IT problems, even though other internal memos refer to IT-related difficulties.
The September memo allows staff to tell complainants "if necessary" that, "Earlier this year we said that we expected to have processed the majority of returns by July, and we very much regret that processing is taking us much longer than we expected." No explanation is given as to why there are delays.
The memo concedes that smaller companies requiring a cheque for £250 - an incentive payment from HMRC for filing online - will not receive it until their tax returns are processed. It asks employers to deduct £250 from their next payment to HMRC.
"We know from your feedback that you are getting a lot of enquiries from employers and agents wanting to know what is happening with the processing of returns, as well as complaints from small employers who want their £250 tax-free payment but cannot 'self serve'."
The full range of problems facing HMRC are likely to be highlighted by MPs at meetings of the Treasury Select Committee and Public Accounts Committee between now and mid-December.
Accountancy organisations slam online PAYE 'debacle'
Senior members of major accountancy organisations have called HM Revenue and Customs' online PAYE systems a "debacle".
In a report, they said, "The situation [with online PAYE filing for large companies] has been thoroughly disruptive and has resulted in further increasing the cost of compliance for employers... payroll agents have been subjected to undue stress and expense through the failings of HMRC to cope with the workload."
The report, compiled by the e-business sub-group of the Association of Accounting Technicians, added, "The department found itself overwhelmed by a predictable volume of work and quite unable to provide a full and effective service to customers. There was massive frustration with the online experience."
All those contributing to the study emphasised the potential benefits of online filing and said the report aimed to help avoid similar serious future problems.
The study was compiled with the help of contributions from members of the Institute of Chartered Accountants of England and Wales, the Institute of Chartered Accountants of Scotland, and the Association of Taxation Technicians.
Revenue confirms system troubles
A spokesman for HM Revenue and Customs confirmed that officials have been contacting some employers to ask whether they have filed online - information it should be able to glean from its own systems.
The spokesman also said that HMRC regretted that "a small amount of information was incorrectly sent to its receiving tax and national insurance systems in the summer".
He added that this had been quickly identified through normal checking processes and action taken to recover all of the affected systems. "This action is now complete and all systems are processing normally," he said.
HMRC referred to delays in processing due to Eric, a system for validating annual employer returns and passing details to the department's main systems. But the spokesman claimed these were "purely down to our testing" of the system and this has had "no material effect on the service we provide to our customers".
He added that Eric is "now processing returns at pace."