Watchdog hits out at taxmen over £650m bill for blunders

Millions were left with unexpected bills after underpaying tax or are due refunds after paying too much after the botched introduction of a new tax collection system at HMRC. Altogether it is estimated that £1.4bn of tax had been underpaid and £3bn overpaid over several years, although exact figures are still not known.

Even though officials knew that seven million people had overpaid or underpaid tax in 2008-09 by December 2009, they did not start informing individuals until September last year because of teething troubles with software.

And by the time they got on top of problems, it was too late legally to chase unpaid tax from earlier years, resulting in £650m having to be written off.

MPs also expressed anger that a senior official whose contract expired was paid £150,000 to stay on as Chief Information Officer for an extra three months – equivalent to a four-fold pay rise – and said there was unfairness in thresholds for writing off debt.

PAC chair Margaret Hodge said: “HMRC’s mismanagement has caused uncertainty and worry to taxpayers and inequity in the system. We now look to the department to be able to demonstrate clearly by the end of 2011 that NPS can process PAYE promptly, accurately and efficiently. Taxpayer confidence must be restored.”

A spokesman for the department said: “HMRC will consider the PAC’s report in detail and respond in due course. We recognise the uncertainty and concern caused to people by unexpected tax bills.

“The new computer system is now allowing us to bring taxpayers records up to date, improving the accuracy and fairness of the tax system for the future.”

A coalition source insisted that HMRC had been making good progress over the past six months.