HM Revenue and Customs has 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.
HMRC staff have told Computer Weekly that incorrect fines, and the IT-related flaw (see box, p4) which caused them to be issued, are 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 various offices had been issued with a spreadsheet with the details of employers fined incorrectly. Staff have been told to review each relevant case, discharge the penalty and "issue a letter of apology to the employer in all cases".
Once the fine has been cancelled, HMRC's compliance system will issue amended notices to all employers and if necessary their agents, and ensure that the fine is not followed up as a debt.
The memo said a "fix" was being made to the compliance system to prevent further incorrect fines being issued at the next penalty run in March 2006.
In a statement to employers HMRC said, "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."
The statement added that the incorrect fines were not due to any further problems with Eric - a system that validates the data in annual returns that are completed online by employers. The full introduction of Eric was delayed by four months last year.
In a separate blunder, the department has instructed some staff to stop processing specific end-of-year tax returns relating to the building industry after the amounts of tax due were mistakenly doubled. "We are urgently investigating this problem," said a leaked internal memo, dated 30 December 2005, which also revealed that the problem may have occurred before.
The memo added that the difficulties had led to a specialist unit within the department - the Central Exception Processing Team - being provided with the wrong amounts to enter as total tax in core IT systems.
HMRC has declined to estimate the cost of putting right the latest mistakes or say which organisation was responsible: HMRC or its main IT supplier Capgemini.
The blunders come at a time when the department is fighting to manage the ramifications of £2bn worth of overpaid tax credits, merge the Inland Revenue and Customs and Excise, and make 12,500 staff cuts and £507m of efficiency savings by early 2008.
Computer Weekly last year highlighted the temporary inability of HMRC's systems and processes to cope with the increasing number of tax returns filed via the internet by employers.
The department was unable to tell whether millions of employees had paid too much or too little tax, it issued incorrect penalty notices to thousands of companies, and had to relax parts of its enforcement regime because of a lack of information on who owed what.
Public spending watchdog the National Audit Office last year refused to sign off the department's accounts because of unacceptably high levels of fraud and error.
An HMRC spokesman said his department's officials were unavailable for comment.
How firms were incorrectly fined
Tens of thousands of businesses have been fined incorrectly for failing to submit a P11D(b) notice, which provides for national insurance contributions on taxable benefits they provide to employees.
In cases where employers did not need to submit P11Ds, they had completed their 2004-05 annual returns by indicating in the appropriate field that a P11D(b) was not due. This was recorded on HMRC's main systems and visible to officials on their screens. But the department's systems did not have a link to stop the penalty-issuing equipment sending out fine notices.
It was not until employers and their professional associations queried the fines with HMRC that the department spotted what had gone wrong.