Errors in tax return software standards mean that two groups of taxpayers may have to submit their 2016/17 tax returns on paper, instead of electronically, to ensure that they don’t overpay their tax.
These problems illustrate an underlying issue with the standards set for tax software by HMRC.
All tax software developers are required to produce tax return software which abides by computational standards set by HMRC. If the software doesn’t follow those computational rules, the tax return will be rejected by the HMRC’s electronic gateway. This is a sensible control mechanism.
Software developers have confirmed that the 2016/17 tax return software must have identical calculations to those performed by the HMRC system, or it cannot be approved by HMRC. Any software house using the HMRC computations should be able to successfully file a return in the excluded scenarios, but the tax due will be overstated. Any software house not using the HMRC computations would suffer mass rejections of returns.
The problems stem from the interaction between the separate allowances for savings and dividends, the personal allowance, and the additional rate of tax on income over £150,000. The two groups of taxpayers affected appear to be:
- those with total income made up of savings and non-savings income over £32,000 of which the non-savings income is between £11,000 and £16,000
- those with non-dividend income of £27,000 to £32,000 plus dividends which take their total income to more than £145,000
Individual taxpayers (not trustees or personal representatives) are entitled to the dividend allowance of £5,000, which taxes the first £5,000 of dividends at 0%, within the tax band the dividends fall into. Dividends are taxed as the highest slice of income.
These taxpayers should benefit from the savings rate band of up to £5,000 as their non-savings income not covered by the personal allowance will not use all the savings rate band. The HMRC tax return software specification fails to give the benefit of the savings rate band in this scenario and hence overcharges taxpayers in this group by up to £1,000.
A taxpayer with non-savings income of £11,000 and savings income of £26,000. The correct amount of tax for 2016/17 is £4,000. Using software based on the HMRC software standards will calculate the tax as £5,000. If you file online the taxpayer will be overcharged by £1,000.
These taxpayers do not receive any personal savings allowance, as their income makes them additional rate taxpayers. However, they do qualify for the £5,000 dividend tax allowance. The HMRC tax software specification incorrectly deducts the dividend tax allowance that falls in the unused basic rate band from the higher rate band which then pushes dividends up into the additional rate. This error could cost up to £280 if the return is filed electronically instead of by paper.
What are we doing
We have purchased additional software to ensure tax is not overpaid. Some returns will now have to be filed on paper. The making tax digital planned by HMRC will I am sure cause further chaos.
Tax experts have confirmed the Finance Bill 2017 is the largest ever UK financial bill in history, covering 767 pages with 313,031 words.