If you are stuck in such a situation, here is what to do.

Mr. Arjun Kapoor, a resident of the fictional city of Northwood, recently received an unexpected letter from His Majesty’s Revenue and Customs (HMRC). The letter, a P2 Coding Notice, suggested that he had underpaid income tax for the tax year ending April 2024. This came as a surprise to Mr. Kapoor for two main reasons: firstly, his employer, a company called “Apex Digital Solutions Ltd.”, manages all his tax deductions through the Pay As You Earn (PAYE) system. Secondly, his total earnings for that year were £12,300, which is below the standard Personal Allowance, meaning he shouldn’t have owed any tax at all. Confused and concerned, he is now looking for clarity on how to address the situation with HMRC.

Advice in such cases

Receiving a notice from HMRC can be daunting, but it is important not to panic. Often, these issues arise from simple administrative errors that can be rectified. The first step is to carefully read the entire notice, paying close attention to the figures and the tax code HMRC has used. Do not ignore the letter, as this can lead to further complications. You should then compare the information in the notice with your own records, such as your P60 and payslips. The discrepancy is often easy to spot, such as an incorrect income figure or a wrong tax code being applied.

Applicable Sections of Law

The UK’s tax system is governed by a framework of legislation. Key acts relevant to this situation include:

• Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003): This is the primary legislation that governs the taxation of employment income and pensions, and it sets out the rules for the PAYE system.
• Taxes Management Act 1970: This act outlines the procedures for the administration and collection of direct taxes, including HMRC’s powers to issue notices, make assessments, and handle appeals.
• Commissioners for Revenue and Customs Act 2005: This established HMRC and sets out its functions and responsibilities for managing the tax system.
• Annual Finance Acts: These acts are passed each year and set the rates of tax and the level of personal allowances. For the 2023-2024 tax year, the standard Personal Allowance was £12,570.

If you are the complainant

As the taxpayer, the ultimate responsibility for ensuring your tax affairs are correct rests with you, even when your employer operates PAYE. If you receive a notice you believe is incorrect, you should take the following steps:

• Gather all your financial documents for the relevant tax year. This includes your P60, your P45 if you left a job during that year, and all your payslips.
• Contact your employer’s payroll or HR department. Ask them to confirm the income and tax figures they submitted to HMRC on your behalf.
• Contact HMRC directly using the phone number on the notice. Explain why you believe the calculation is incorrect. Have your National Insurance number and the notice reference number ready.

If you are the victim

In situations where an underpayment has occurred due to an error made by either your employer or HMRC, you may not be liable to pay the tax. You can request HMRC to write off the arrears under a specific rule known as Extra-Statutory Concession A19 (ESC A19). For this to apply, you must show that you had a reasonable belief that your tax affairs were in order and that HMRC or your employer failed to use information they had in their possession to get your tax right. There are strict time limits for this, so it is important to act promptly.

How the police behave in such cases

An underpayment of tax is a civil matter, not a criminal one. The police will have no involvement in this process. This is a matter to be resolved directly between you, your employer (if applicable), and HMRC. HMRC will handle the issue through administrative channels, such as correspondence, phone calls, and adjustments to your tax code. Police involvement would only ever be considered in serious cases of deliberate and fraudulent tax evasion, which is entirely different from an accidental underpayment or an administrative error.

FAQs people normally have

• Why has this happened if my tax is deducted via PAYE? Errors can happen for several reasons. For example, HMRC may have been given an incorrect tax code by your employer, you may have changed jobs and the information wasn’t updated correctly, or HMRC may have incorrect records of other sources of income you might have.
• Will I have to pay the full amount immediately? If it turns out you do owe the tax, HMRC will typically not demand a lump sum. The most common method of recovery is to adjust your tax code for the following year, which spreads the repayment over 12 months. For larger amounts or cases of financial hardship, you can also contact HMRC to arrange a ‘Time to Pay’ instalment plan.
• What if my earnings were genuinely below the Personal Allowance? If your total income from all sources for the tax year was under the Personal Allowance (£12,570 for 2023-24), you should not owe any income tax. The notice is almost certainly based on incorrect data, and you must contact HMRC to provide them with the correct figures.

What evidence is required?

To challenge a tax notice effectively, you should have the following evidence ready:

• Your P60 form for the tax year in question, which summarises your total pay and the tax deducted.
• Your final payslip for that tax year.
• The notice or letter you received from HMRC.
• Records of any other taxable income or benefits you may have received.

How long will the investigation take?

The timeline for resolving the issue can vary. A simple error that can be clarified over the phone with an HMRC agent might be resolved within a day, with a new tax code issued shortly after. If the case is more complex and requires you to send documents for review, it can take several weeks or even a few months for HMRC to process the information and send you a final decision.

Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of 100 GBP to 400 GBP depends case to case. He is helping you in this situation of come out. He is expert in the domain and can help you explain the procedure which you might have never explored.

Advocate Sudhir Rao, Supreme Court of India