Inland Revenue has gained up to £20m after closing off the tax records on nearly 800,000 people whose pay and tax details for the 1997-98 year went "missing" from its computer systems.
The windfall follows problems linking a new national insurance recording system (Nirs2), with the Revenue's 20-year-old computerised operation of pay-as-you-earn (COP) equipment.
These and other difficulties arising from the fraught introduction of Nirs2 in 1997 caused a backlog of work, to the extent that the Revenue cleared from its systems 1.04 million unresolved cases where no pay or tax details for 1997-98 could be found - despite not knowing whether the individuals had paid too much or too little tax.
After this automatic clearance of records was revealed by Computer Weekly, the public spending watchdog, the National Audit Office, published a critical report. It said the automatic clearance of the 1997-98 records was a "failing in the normal operation of the PAYE system". It added that the impact on individual taxpayers could be significant and suggested they be alerted.
As a result, the Revenue wrote to all 1.04 million taxpayers last summer, asking if they wished their records for 1997-98 to be reviewed in case they had not paid the correct amount of tax. They were advised to contact the Revenue if they could support a claim that they had paid the wrong tax with documentary evidence. No deadline was given.
In a memo to the House of Commons Public Accounts Committee last year, the Revenue estimated that, of the 1.04 million outstanding records in the 1997-98 tax year, in about 13% to 15% of cases the wrong amount of tax had been paid. The department told the committee that an estimated 148,000 people had overpaid about £22m, while about 12,000 taxpayers had underpaid by a total of £4m.
Now the Treasury minister Dawn Primarolo has conceded in a letter to Liberal Democrat Treasury spokesman Matthew Taylor that fewer than a third of the letters elicited any response from taxpayers.
Only 13,657 repayments have been made, averaging £112.73. This is less than 10% of the total numbers expected to claim refunds. And 1,667 people had underpaid, compared with the Revenue's estimate of 12,000.
The result is that the Revenue has made refunds of £1.54m, instead of the £22m originally anticipated. As the cost of sending out the letters was less than £400,000 the net gain to the Exchequer is up to £20m.
The Revenue says the amounts of the underpayments are too small to bear any statistical validity.
Taylor, who learned of the £20m windfall only after writing three letters to the Treasury over a six-month period, said few people had responded to the letters because they probably feared it would cost them money.
Primarolo said the Revenue had closed the records on 774,000 people, assuming that "people who did not respond are content that their tax affairs are in order for that year".
An Inland Revenue spokesman said on Tuesday that the "vast majority" of the 774,000 closed cases had paid the correct amount of tax. The Revenue denied that any records had been lost and said the difficulties of posting data from Nirs2 to COP have been resolved.
However the Revenue confirmed that it was retaining an estimated sum of between £17.5m and £21m that might have been refunded to taxpayers if the systems had been working normally.
Missing tax files
More than a million 1997-98 tax records went missing after interface problems occured between the Nirs2 and COP systems:
- New strict Nirs2 data validation routines rejected more records than expected
- Tapes containing data were incorrectly labelled, incomplete or unreadable
- A design flaw in Nirs2, since corrected, meant that data could not always be matched automatically to COP records.