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NAO issues warning on HMRC Scotland tax notification errors

Neil Merrett Published 20 December 2016

Despite welcoming progress in Scottish Rate of Income Tax (SRIT) management, auditor says significant challenges remain in maintaining up to date customer records


The National Audit Office (NAO) has called on HM Revenue and Customs (HMRC) to ensure its systems are capable of handling key data on taxpayers such as address information after difficulties experienced late last year in managing the Scottish Rate of Income Tax (SRIT) records.

According to new findings from the national auditor, an error identified within HMRC’s taxpayer identification exercise led to 420,000 individuals in Scotland not receiving notifications about their current payment status last December.

“HMRC was notified quickly of this issue by other stakeholders, such as the Scottish Government, employers and taxpayers. HMRC engaged its IT supplier to investigate the issue in January 2016, and confirmed the total number of affected individuals in April 2016,” noted the report.

“The 420,000 omitted taxpayers received coding notices which informed them of the change in their annual tax code, and provided basic information on what was meant by an 'S' code. By not issuing the same level of information as the 2.45m taxpayers originally identified in December 2015, HMRC may have created a less informed group of taxpayers.”

By June 2016, the NAO noted that an interim solution had been implemented to issue coding notices for the 2016/17 tax year to the 420,000 people affected.  This solution was replaced in October with technology focused on allowing these individuals' detials to be managed via HMRC’s automated processes in order to ensure more accurate taxpayer records.

A future report from the auditor is expected to consider these changes.

“HMRC’s ability to assure the amount of tax collected for the Scottish Government will be undermined where taxpayers fail to update their address details. HMRC should continue to communicate this key message to taxpayers. In 2015-16, HMRC spent £1,081,000 on communications with potential Scottish taxpayers about SRIT,” said the NAO.  “HMRC has engaged with employers, agents and payroll specialists to raise awareness with key stakeholder groups. It has also conducted specific research with perceived 'high risk customer groups' to evaluate the effectiveness of its wider communication approach.”

Progress areas

Despite accepting that progress was being made to ensure the proper assessment and collection of income tax in Scotland, significant challenges were said to remain around ensuring the continual updating of key records.

One major risk identified in the report was in the ability of authorities to establish an IT system to allow pensions providers to claim at source, which the auditor argued could in turn put further pressure on the need for accurate data systems.

“If tax rates between Scotland and the rest of the UK diverge, Scottish taxpayers will be due a different rate of relief-at-source on their personal pension contributions,” said the findings.

“From 2018, HMRC must notify pension providers of the correct rate of income tax for their scheme members to allow pension providers to apply the correct rate of relief-at-source. HMRC is working closely with the pensions industry to deliver the solution required for the relief at source system to accommodate the SRIT.”

Auditor general Amyas Morse has warned of a number of challenges facing Scottish authorities in improving how SRIT can be administered, not least when considering differences with other parts of the UK.

“It is crucial that [HMRC] maintains accurate address information for Scottish taxpayers, and ensures that the potential for tax avoidance and evasion is mitigated,” he said. “HMRC also needs to be able to report the actual amount of SRIT collected to the Scottish Government, and provide an IT solution that allows private pension providers to claim relief at source.”

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