HMRC finds two employers ‘consistently applying Scottish tax codes incorrectly’

Tax bosses are to contact two firms which have been “consistently applying Scottish codes incorrectly”, MSPs have been told.

Jonathan Athow, a senior official with HM Revenue and Customs, refused to name the employers involved.

But he warned it is workers who could be the ones impacted by such errors – with the different tax rates in Scotland meaning people could be paying either too much or too little in income tax.

He spoke about the issue when he appeared before MSPs on Holyrood’s Public Audit Committee on Wednesday.

The UK’s Pay As You Earn (PAYE) system applies an S prefix on the tax codes of people living in Scotland, so they pay income tax at the rate set by Holyrood, not Westminster.

If they are taxed at the wrong rate, you will end up chasing them and it is not their fault

A letter sent to the committee earlier in March revealed HMRC has “identified the employers with the highest number of errors related to Scottish codes in the last three tax years”.

The employers involved cannot be named publicly because of data protection laws, but Mr Athow, HMRC’s director-general for customer strategy and tax design, said the work had “identified two employers who are consistently applying Scottish codes incorrectly”.

He said the findings of the research are “hot off the press” and HMRC will update the committee once it has had “conversations” with the employers involved.

Phil Batchelor, HMRC’s deputy director for income tax policy, said he will “take a personal interest” in “making sure we get that follow-up done with them and we get the right action plan in place to get that resolved”.

Conservative MSP Graham Simpson said it is the employees involved who are the “potential losers”, telling the HMRC officials: “If they are taxed at the wrong rate, you will end up chasing them and it is not their fault.”

Mr Athow said an “end of year reconciliation” system will allow workers to pay the bill for any underpayment of tax, or indeed reclaim money back if they have paid too much.

Because Scottish income tax rates are lower than the rest of the UK for lower paid workers, he said “some people” could be “collecting a tax repayment”.

But with the Scottish Government imposing higher rates of income tax on middle and higher earners, he added: “Obviously if you are a higher income person and it is not operated, you could end up with a larger bill.”

Adding the costs involved will be “entirely on the taxpayer”, he acknowledged “for some people on a tight budget that could be challenging for them”.

His comments came as he ruled out changing the system to make it compulsory for people to inform HMRC of their address.

The authority applies “S codes” to people in Scotland, identifying them as paying income tax at the rates set by Holyrood – with Mr Simpson questioning whether the “tax divergence” between Scotland and the rest of the UK means there should be a legal requirement for people to inform HMRC of their address.

But Mr Athow said: “The case is not there for change in that.”

Noting that “people don’t like filling out forms”, he said HMRC could often collect address date from other Government records.

Mr Athow added: “At the moment, because we are seeing high confidence in our address matching, it would not be the right time to increase the burdens on taxpayers in terms of reporting to us.

“Just because that is the situation at the moment, doesn’t mean it will always be so.”