HM Revenue and Customs has deferred a vital part of its IT-led modernisation plans for two years because of technical difficulties and a shortage of capacity.
The delay comes after the first phase of the plan, dubbed Modernisation of PAYE Processes for Customers (MMPC), ran into problems earlier this year.
The full go-live of Eric, a system for validating PAYE data filed online by employers, was delayed by four months, creating a backlog of work in ensuring that up to 20 million PAYE employees paid the right amount of tax.
The start of the second phase of MPPC has now been deferred from 2005 to April 2007.
MPPC involves simplifying inconsistent PAYE business processes that date back 60 years, and replacing old systems to give a single view of taxpayers, rather than having their information stored in different places.
The modernisation would allow more tax to be collected because incorrect tax codes would be corrected and information on all sources of employee income would normally be visible to tax collectors. It would also save money by rationalising the systems used to process end-of-year returns.
Officials view the delay as a pragmatic response to feasibility studies and a "departmental capacity review".
One of the difficulties facing the department is that it needs more money to improve ageing IT systems and support simplified processes, but it is constrained by the need to contain spending within existing budgets in line with Gershon efficiency targets.
The Gershon efficiency review requires HMRC to cut £507m from its spending by April 2008. The deferral of the second phase of MPPC to 2007 will put off realising savings until close to that deadline.
The department is reviewing its delivery plans to see whether this will have an impact on overall savings required during this period, a spokesman said.
HMRC's capacity to manage major change underpinned by IT has also been limited by the need to divert manpower into dealing with backlogs of work created by the problematic introduction of Eric this year and tax credits in 2003.
Another factor in delays to the modernisation plan is the scale of the technical challenge.
In May, HMRC's departmental minutes said of the MPPC plan, "Some of the new functionality is proving hard to crack and we will not be rolling out Eric as quickly as expected." The board put the performance of MPPC at "red", indicating the project was in difficulty.
But board minutes have not mentioned the deferral of MPPC. Nor was the deferral mentioned in an annual report on HMRC published by public spending watchdog the National Audit Office in October.
A spokesman for the Revenue said the deferral would put off the creation of a single customer view for an individual. It would also delay automation of internal processes and the IT support to enable records to be worked on in any of the department's offices.
"HMRC regularly reviews the work we are doing to ensure value for money - and this includes looking at what is affordable and how best we use our IT capacity," he said.
"Like all organisations, HMRC and its partners have finite funding and IT capacity and sometimes, for example where the solution to a technical challenge is taking longer than envisaged, we move around our planned work to ensure we continue to use that capacity to deliver the best value for money."
The spokesman added, "Our PAYE system needs updating to reflect how the department works and our customers' needs. As the PAYE system is one of the department's largest, there is scope for greater efficiency savings. So MPPC is a vital component in delivering HMRC modernisation plans."