A plan by the Scottish government to raise the tax threshold for higher-rate taxpayers was affected by a database error that meant HMRC failed to identify and inform as many as 420,000 people who could be affected by the changes.
According to a report by the National Audit Office (NAO), a database selection error meant that as many as one million tax-paying residents of Scotland were not sent the letters that they should have been informing them of the Scottish government's tax plans - out of total Scottish number of income tax payers of 2.45 million.
The errors were revealed in the NAO In its report issued this week, entitled ‘The administration of the Scottish Rate of Income Tax 2015-16'.
The error meant that as many as 420,000 taxpayers in Scotland may have been sent the wrong tax code.
Since the start of the tax year in April 2016, the Scottish government has been empowered to apply its own Scottish Rate of Income Tax (SRIT) to ten-pence-in-the-pound of income taxes.
For the current financial year, the Scottish government has kept rates and thresholds the same as in the rest of the UK. From the next financial year, its powers have been extended, enabling it to set the rates and band thresholds. The Scottish government is planning to raise the thresholds for Scottish higher-rate taxpayers, effectively increasing their taxes compared to workers south of the border.
HMRC will continue to collect taxes across the UK, but needs to accurately identify Scottish taxpayers.
"HMRC's strategy for identifying Scottish taxpayers involved using a taxpayer's postcode to identify whether they lived in Scotland or elsewhere in the UK. To implement this, HMRC scanned all the individual records within its database in October 2015," explained the report.
It continued: "The scan added a Scottish flag to records with a Scottish postcode, identifying 4,965,840 records as Scottish. HMRC sent Scottish taxpayer notification letters to 2,453,763 individuals at the start of December 2015."
However, "HMRC discovered that the scan was incomplete following contact by members of the Scottish Government and the public who had not received, or knew people who had not received, Scottish taxpayer notification letters".
The reason, according to the report, was that HMRC's postcode data was incomplete.
"The parameters of the scan were set to flag Scottish residential addresses verified by the Royal Mail Postcode Address File (PAF). However, many addresses held by HMRC are classified as ‘as input', where an individual's address has been entered without using the PAF verification facility," claimed the report.
Identified in January, the remedial work to fix the problem was not completed until the start of the new tax year, although tax payments were not affected.
"The work was completed in April 2016 and revealed that approximately 850,000 records with a Scottish postcode were not flagged as Scottish by the initial scan in October 2015. HMRC's analytical team then estimated that 420,000 of the 850,000 Scottish records omitted were potential Scottish income taxpayers who should have received a Scottish taxpayer notification letter," concluded the report.
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