HMRC slow to admit its systems issued incorrect penalties - for third year running

Systems at HM Revenue and Customs have issued up to 14,000 unjustified penalty notices, each of £400, to employers that had correctly filed their annual returns by the deadline of 19 May 2007.

It’s the third year running the department’s systems have issued thousands of unjustified penalty notices to companies, more than one million of which file online. The Revenue owned up to the latest incident on 4 October 2007 only after being contacted by Computer Weekly and by complainants that included payroll agents.

Penalty notices were issued automatically for the tax year 2006/7 during a batch run of the Revenue’s systems on 24 September 2007. They were issued if they had not recorded the receipt of an annual return for an employer that has registered for Pay As You Earn [PAYE]. These returns tell the Revenue how much tax and national insurance has been paid by employees during 2006/7.

Initially, when Computer Weekly contacted HMRC about the incorrect fines last week, its spokesman said there was no evidence that false penalties had been issued. A spokesman put the blame on a misunderstanding by those filing returns.

He said employers or their agents had filled out annual returns online using the test mode instead of submitting them correctly in real-time which is required to avoid penalties. The Revenue does not accept a “test return” as an actual return.

Computer Weekly then pointed out to the HMRC spokesman that specialists who had complained to Accounting Web about incorrect penalty notices – and who were mostly accountants and payroll experts – were unlikely all to have been wrong. A day later HMRC conceded that it had issued penalties incorrectly to up to 14,000 organisations.

The spokesman said the number of incorrect penalties was “fewer than eight per cent” out of the total of 202, 000 penalty notices. But the department was unable to explain what had gone wrong – which raises a question of how it knew the number of incorrect penalties was confined to a maximum of about 14,000.

A Revenue statement said: “An early investigation into the validity of the penalty has found that a small amount and certainly no more than 8% maybe be invalid. While the cause is still being investigated, early results have indicated that this seems to be IT systems management (i.e. a human element) rather than an unknown IT systems fault.”

It added: “We are urgently investigating and will provide an update as soon as we can by Tuesday 9 October at the latest.”

Revenue’s systems a “major bugbear”

Online filing of annual returns is supposed to be faster and cheaper than paper submissions. But Nichola Ross Martin tax editor at Accounting Web said that the poor reliability and accuracy of the Revenue’s IT systems have been a “major bugbear” to employers that file annual returns online.

Many employers contract out the online filing of their annual returns to accountants and payroll software specialists. Ross Martin said that when employers receive incorrect penalties they are apt to blame their outsourcing payroll specialists for not filing returns before the May deadline.

Matt Boyle, a researcher for PAYE, said it is costing employers, payroll companies and accountants millions of pounds to deal with the incorrect penalties, in part because agents have to contact their clients to explain the penalty notices.

One payroll agent told Accounting Web that incorrect penalties alarms its customers and “makes us look incompetent”.

In 2005 the Revenue’s Chief Information Officer Steve Lamey pointed out some systemic weaknesses in the department’s processes and IT. Since then the National Audit Office has pointed out that the Revenue is seeking to modernise its PAYE systems which are based on ICL – now Fujitsu – mainframes.

But Ross Martin said the reports about the HM Revenue and Customs by the National Audit Office have “swept problems with online filing under the carpet”.

HMRC also issued incorrect penalties in 2006 and 2005

In January 2006 HM Revenue and Customs apologised to 10,000 firms after fining them at least £400 each by mistake because of a basic flaw in the design of automatic systems that issue penalty notices.

Companies had completed returns correctly but HMRC’s systems were not set up properly to stop penalty notices being issued in some cases. It was not until employers and their professional associations queried the fines with HMRC that the department spotted what had gone wrong.

HMRC staff said at the time that incorrect fines, and the IT-related flaw which caused them to be issued, were one symptom of the department’s losing its battle to cope with huge backlogs of work alongside its statutory responsibilities.

A leaked internal memo said that various offices had been issued with a spreadsheet with the details of employers fined incorrectly. Staff were asked to review each relevant case, discharge the penalty and “issue a letter of apology to the employer in all cases”.

Once the fine had been cancelled, HMRC’s compliance system would issue amended notices to all employers and if necessary their agents, and ensure that the fine was not followed up as a debt.

In a statement to employers HMRC said in 2006:

“We would like to apologise to employers and affected agents for the inconvenience undoubtedly caused by an error in our systems. We recently discovered that approximately 10,000 employers received penalty notices for 2004-05 although no penalty is due. This came to light because of the welcome increase in online filing.”

More incorrect penalties issued in March 2007

In March this year 154,000 PAYE filing penalty notices for 2005/06 were issued without any warning, nearly ten months after the filing deadline. As penalties increased by £100 per month, the total fine for many companies was £900 each.

Ross Martin said of the 2005/6 penalties: “It transpires that a sizable proportion of the penalties appear to be invalid, simply issued due to some sort “glitch” in HMRC’s beleaguered PAYE computer system. For instance, there have been many reports of penalties received for late submission of form P35 for dormant companies and “nil” liability returns filed on-line.”

Institute of Chartered Accountants in England and Wales – a “debacle”

The previous year, 2005, HM Revenue also sent out thousands of incorrect penalties. The Institute of Chartered Accountants in England and Wales described the issuing of incorrect penalties for the 2004-05 tax year as a “debacle”.

In a paper submitted to the House of Commons’ Treasury committee in July 2007, the Institute of Chartered Accountants in England and Wales had more generalised criticisms of HMRC. It said:

“Recent Institute of Chartered Accountants in England and Wales member research designed to measure the service levels our members are experiencing in their dealings with HMRC has indicated a significant decline in HMRC Customer service levels.”

The Institute also said that simple processing requests, such as changes of address, had to be repeated in a large number of cases. “This wastes time for agents, their clients and, presumably, for HMRC staff.”

The Institute added:

“We remain concerned at the implementation of HMRC’s e-services on the ground. Major system errors continue to occur which result in wasted time and costs and a lack of confidence in the services.

“This hinders efforts to improve the take-up of such services. HMRC’s e-services should be subject to oversight by an independent body and services should only be introduced after thorough testing so as to ensure that the services are “fit for purpose”.


It’s said that Nature is seldom in the wrong but custom always. At HM Revenue and Customs the annual issuing of incorrect penalties to thousands of companies seems to be passing into the HMRC Manual of Operations.

Every organisation makes mistakes and nobody can blame the Revenue for getting it wrong. It is bedevilled with one grief after another – tax credit overpayments, fraud and error, a tax gap of billions of pounds, antiquated Fujitsu-based software, duplicated processes, fragmented data and increasing complexity.

What upsets employers, however, is the way the Revenue’s board seems not to care whether mistakes are repeated. I am sure the directors do care – it just doesn’t show.

I’ve written some further comment on this topic in a separate blog entry.

These are some of the comments posted to Accounting Web on the incorrect issuing by HMRC of penalties for the tax year 2006/7:

“Just had a call from HMRC in response to my appeal against a 17th May filing penalty to say penalty cancelled and – sorry. It was a nationwide problem caused by computer error….

That’s fine then, as a loyal customer, I won’t take my business elsewhere.”


“The ineptitude beggars belief. So, I scan the HM Revenue and Customs’ site looking for info – an explanation or – even – an apology? What do I find?”


“Today I received a £400 penalty for a PAYE scheme I didn’t know existed for a company and that has neither, never traded nor ever had employees. I have therefore, sent a penalty note to the Revenue for £50 to part cover wasted professional time.”


“HM Revenue and Customs’ view of Customer Service is clearly different to that which the commercial world would subscribe. Who will cover the costs of explaining to clients that although HMRC issued a Penalty Notice, it was wrong and that we, their agents, are not at fault. Perhaps a Podcast by Dave Hartnett [of HMRC] would do the trick?”


“HMRC Employer’s Helpline confirmed to us on the phone today that some 175,000 penalty notices have been issued in respect of electronic lodgements on 17 May, and due to a computer glitch, most of these are incorrect.”


“I’ve got the penalty notice today – my software says it was received by HMRC on 17 May [the deadline being 19 May 2007] as well. But my client has faxed the penalty notice asking for £400……”


“We too have received a pile of penalties for returns already filed. It would appear that they were all filed on the 17th May. We have been informed by the online services helpline that they are in a queuing system at the offices to which they relate (4 months later) This is absolutely ludicrous and a waste of our time for failings yet again in the Revenue’s online filing systems.”


“… Instead of investigating, or contacting the client or me to explain and perhaps find a solution, you [HMRC] wait over four months and then just send out a £400 fine which alarms the client and makes us look incompetent.”


“You’ll have to write an appeal letter” – No accountability – just rank bad management.”


“Just got one [penalty notice] for a company that never traded and for which we didn’t set up a PAYE Scheme. Sent HMRC a bill for £50.”


“I have just received one [a penalty notice] for a company in our group. Upon investigation the nice lady from HMRC told me that it had correctly flagged on the last return that the [PAYE] scheme was closed and therefore we shouldn’t have a return to complete, and indeed we didn’t. I now have to write and explain all this again.”


“We have now received penalty notices for 30 of the 53 that we submitted on the 17th May … Out of the 53 submitted on that day we have only received 1 incentive notice.

So I guess we can expect to receive a further 22 penalty notices next Wednesday if they don’t get lost in the post.”


“From HMRC: ‘Although returns are due by 19 May, penalty notices have been issued only where these have not been recorded on our systems at 28 May. So, if you know that your returns were sent in by 28 May 2007 we suggest that you do not contact HMRC about any penalty notice you have received nor formally appeal against the notice until we have issued our next update.’

“When I contacted them regarding such a notice by phone earlier this week, they stated that a written appeal was necessary.”


HMRC: We’re cancelling penalty notices centrally [9 October 2007]

Spin and mistakes by HM Revenue and Customs

Accounting Web – comments on incorrect penalties

HMRC announces new era of openness

Concern over HMRC attempts to constrain directors’ public speeches

Watchdog raps harsh tax credits

Revenue red-faced as IT system wrongly fines 10,000 companies

Revenue makes 500,000 mistakes in tax codes