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HMRC self-assessment calculation errors

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5 April 2017

Errors in HMRC’s self-assessment software are leading to online tax returns for the 2016/17 tax year either being rejected or tax being overstated. As a result, some taxpayers might be required to file their tax returns on paper rather than online.

The issue

HMRC’s software for 2016/17 tax returns has not been updated to correctly calculate the tax due with certain combinations of income and utilising the various savings and personal allowances in the most favourable way. This also includes the new £5,000 dividend allowance introduced in April 2016. 

If you are using a third party software to submit your tax return and your income falls within one of the exceptions detailed below, the tax return may be rejected at submission. Although the tax due calculated by the software is likely to be correct, an error in HMRC’s code is resulting in a different (and higher) tax liability and because of the difference in calculation the return will be rejected.

Conversely, if you are using HMRC software to submit your tax return it will let you submit but, as a result of the errors, the tax calculated may well be overstated by up to £1,000. 

The software providers are required to follow the same code as HMRC, so updates may be made in the next version of releases which will enable submission, but again this could result in overstated tax due, as detailed above. 

Who might be affected

So far two groups of individuals have been identified as potentially being caught out by the HMRC glitch when trying to submit their 2016/17 tax returns.

  1. Individuals with savings and non-savings income exceeding the basic rate threshold of £32,000 with the non-savings income being between £11,000 and £16,000. In this case HMRC software does not allocate the savings allowance to the taxpayer which could save up to £1,000 tax. 
  2. Individuals with non-savings and savings income of between £27,000 and £32,000 and dividend income which takes their total income into the higher rate band (i.e. more than £32,000). In such situations the HMRC calculator is reducing the higher rate band by the full £5,000 dividend allowance rather than first allocating some of the allowance to the basic rate band, with the balance offset against the higher rate band. 

Action to take

HMRC have, somewhat frustratingly, confirmed that they will not be correcting the error until the 2017/18 filing. They have, however, recently issued an exclusions list from online filing for which both of the above cases are included. For those affected it will, instead, be necessary to file a paper return. The deadline for a paper return is 30 October 2017, however, HMRC have confirmed that they will extend this to the online filing deadline of 31 January 2018 for those specified cases.

To avoid an automatic late filing penalty, HMRC also advise that a ‘reasonable excuse’ claim should be submitted along with the paper return.

These issues, along with the time to rectify, do not fill us with a great deal of optimism for the introduction of Making Tax Digital next year!