I Underpaid Tax But It Wasn't My Fault! What Should I Do?

January 7, 2019

Underpaid tax is something that thousands of people have to deal with each year. Unfortunately, HMRC usually checks whether you have paid the correct amount of tax several months after you actually receive your income, which means people have often already spent the money HMRC wants back.

The first someone will hear of underpaid tax is when they receive a P800 Tax Calculation letter from HMRC. A P800 is basically a letter saying HMRC has checked the amount of tax you paid and concluded that you paid too much or too little.

In the remainder of this article, I will look at the nitty-gritty of underpaid tax and how you should respond if you receive a P800.

Why did you underpay?

There are literally hundreds of reasons why someone may have underpaid tax. Common causes include having more than one job, changing jobs, drawing income from your pension, becoming widowed or leaving the country.

(As I mentioned, there are hundreds of specific reasons so it’s impossible to detail them all here.)

Should I check my P800 calculation?

If you receive a P800 indicating that you owe tax, it’s very likely that you will end up having to pay it back to HMRC. However, before you dig out your cheque book, it’s always worth checking HMRC’s calculations to see if they’re accurate.

Here are a few figures in the P800 that I recommend you pay close attention to.

  • Estimated Figures: HMRC often uses estimated figures in its calculations for efficiency. Always check all estimated figures against the real figures in your own records. Your latest P60 is a good place to start as it will show what you actually earned and actually paid in tax over the past year.
  • Combined Figures: HMRC will usually combine all your income into a single figure. If you have several different sources of income, this is really unhelpful as it’s impossible to separate out the different streams. When this is the case, I recommend you contact HMRC for a full breakdown.
  • Omissions: This is a bit like playing spot the difference with only one picture but it’s still worth spending some time looking for any omissions that would have affected your tax liabilities if included. This includes things like pension contributions and charity donations.

As well as checking the technical correctness of the P800, you should also think about what caused the underpayment in the first place.

Again, here are just a few questions to ask yourself.

  • Did my employer make a mistake? Underpaid tax is often caused by a mistake from your employer. A common mistake is when your employer mistakenly uses a different tax code than the one provided to them by HMRC. If you feel your employer is at fault, I recommend you contact HMRC, explain your situation and ask them to explain why the underpayment occurred.
  • Did HMRC make a mistake? While HMRC does its best to minimise errors, mistakes will inevitably happen. If you believe HMRC has genuinely made an error, contact them and challenge them on their calculation.
  • Did HMRC misinform you? This is related to the above point but refers to information or guidance provided by HMRC rather than their actual work. If HMRC has provided you with incorrect advice (and you can prove it), it’s advisable you contact them and challenge them.

If HMRC’s calculations are correct and no one has made a mistake, you will have to pay back the missing tax.

However, since you received your income several months ago, it’s likely you’ve already spent the money that should have been earmarked for tax. In these situations, individuals often struggle to come up with the money to repay HMRC.

What if I can’t repay the tax?

If you legitimately cannot pay HMRC what it says you owe, they may offer what’s called a Time to Pay (TTP) arrangement.

While it might not seem like it when you receive your P800, HMRC does understand that it’s difficult for individuals to pay significant sums of tax, especially when the demand comes as a complete surprise.

A TTP arrangement is a formal agreement between an individual and HMRC that grants the individual extra time to repay their debts. Instead of paying the full debt immediately, they're allowed to pay back the debt in installments.

When arranging a TTP, it’s important you do not overcommit and agree to unrealistic payments as that reduces the likelihood of you successfully completing the arrangement.

If you are worried about your ability to pay HMRC with or without a TTP arrangement, it is advisable to seek support and assistance from a suitably experienced and qualified organisation like 180 Advisory Solutions.

At 180 Advisory Solutions, we are a Glasgow's based insolvency practitioner with extensive experience dealing with HMRC and would be happy to work with you. For a free initial conversation, please contact our team today.

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