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Income tax is processed accurately in the majority of cases by HM Revenue & Customs, but errors in processing lead to the wrong amount of tax being paid by around 1 million taxpayers, the NAO says today.

In a new report to Parliament, the spending watchdog points out that HMRC accurately calculates the right amount of tax in 95 per cent of income tax cases. The total level of processing error is higher than this, but some errors are mistakes in taxpayer records which do not affect the tax payable.

The Department subsequently corrects errors it finds or which are brought to its attention by the taxpayer. Consequently, the remaining errors resulted in an estimated £125 million of tax underpayments and £157 million in overpayments affecting around 1 million taxpayers during 2006-07. Processing errors have a much wider impact as they result in anxiety, time and effort for taxpayers in putting matters right, and additional costs for the Department in reworking cases.

Taxpayers with complicated tax affairs, such as people on pensions and those with several jobs and sources of income, are more likely to suffer from processing errors which can lead to both underpayments and overpayments of tax, according to the NAO. The average underpayment during 2006-07 was around £250 and the average overpayment around £290, although some errors can lead to unexpected demands for repayment of much larger sums.

Major causes of error are the increased complexity of processing work as people change jobs more frequently and the need to process certain cases manually. Accuracy rates vary significantly across local offices and some offices have achieved improvements by better targeting of workloads to staff skills; better management focus on accuracy; and more sharing of good practice.

Today’s report also found that HMRC’s projects to automate clerical processes have been successful in reducing levels of error, and it is managing its performance more effectively. Processing work is at the forefront of major changes in the Department such as modernising IT systems and re-engineering of processing work through ‘Lean’ working which aims to increase accuracy rates and productivity, as well as to reduce costs. Recommendations in the report include: HMRC developing an early warning system for emerging processing problems; separating out more complex cases for processing; developing staff training; and strengthening the help available for taxpayers affected by errors.

Sir John Bourn, Head of the NAO, said today:

"HMRC has improved its processing of income tax returns but there are still substantial numbers of taxpayers who are affected by processing errors. Vulnerable groups such as pensioners are likely to be disproportionately affected. The recommendations in my report will help the Department build on the work already underway to improve the processing of tax returns."

Notes for Editors:

1. Press notices and reports are available from the date of publication on the NAO website, which is at www.nao.org.uk . Hard copies can be obtained from The Stationery Office on 0845 702 3474.

2. The Comptroller and Auditor General, Sir John Bourn, is the head of the National Audit Office which employs some 850 staff. He and the NAO are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.