HM Revenue and Customs is making errors in calculating at least a quarter of taxpayers' PAYE codes, leading employers to deduct the wrong amount of tax, according to the House of Commons Public Accounts Committee.
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The Revenue also made errors in processing 500,000 returns, leading to £65m of undercharges of taxpayers and £30m of overcharges, according to the report, which highlighted many of the issues raised in Computer Weekly's Making the Tax System Work campaign.
The report outlined the department's struggle to cope with the 1.6 million self-assessment forms filed online in 2004-05, although last month's online tax filing deadline did not suffer the service outages of previous years.
Public Accounts Committee chairman Edward Leigh said, "HMRC is responsible for errors in processing returns in 5% of cases. And some 30,000 taxpayers received incorrect penalty notices even though they had actually filed on time. The department must improve its performance in this area."
He urged the department to introduce a system that can track errors in processing, coding, the imposition of penalties and their enforcement.
The report also called for improvements in telephone helplines, online forms and improved training for call centre staff and to extend the hours of service at peak periods throughout the year.
HMRC said it was developing better IT, which it expected to remove a third of its coding errors.