Shape of Things to Come?

HMRC software can’t cope with its own legislation

Despite tax changes announced in 2014 and 2015 Budgets, HMRC’s tax return software can’t cope with the intricacies of the taxation of investment income and won’t be able to fix the problem until next year!

The complexity of the changes to the taxation of dividends and savings income regime has proved a bridge too far for HMRC’s software and has caused it to overstate certain individual’s tax liabilities for 2016/17. Interaction of the £5,000 dividend allowance and savings and the 0% savings rate band have been blamed for the malfunction.

Two groups of taxpayers are potentially affected:

1. Individuals with non-savings income less than the personal allowance and starting savings rate, ie  between £11,000 – £16,000, plus savings income not covered by any personal savings allowance they are entitled to, the software is not applying the 0% starting rate to up to £5,000 of their savings income.
2. Individuals who have non-savings income, savings and dividend income, where their income exceeds the basic rate band of £32,000, the software incorrectly allocates the dividend allowance that results in more dividend income being taxed at the additional rate of 45%. This will affect those people with dividend income and paying tax at higher rates.

HMRC has promised it will fix these problems in time for the 2017/18 tax returns but for those taxpayers currently affected, HMRC have instructed them to file a paper tax return by 31st October 2017 which is the statutory filing date for non-electronic returns. Paper returns filed after 31st October should include a ‘reasonable excuse’ claim by citing HMRC’s exclusion from online filing.

HMRC have said that no one has paid the wrong amount of tax thus far and that only a very small percentage of Self Assessment taxpayers will be affected because of the unusual combination of income types. Whilst that may be the case, the department’s publicity in alerting taxpayers to this problem has been somewhat lacking.

As HMRC plough forward with its Making Tax Digital programme, one can only hope that these sort of problems will not be a future feature of our fully digitalised tax system but don’t hold your breath!