Reconcile individual: end of year reconciliation: tolerances
When you review a case you should consider the tolerances before you take any action. Tolerances are applied to both underpayments and overpayments within the PAYE Service (albeit that they are / may be at different levels dependant upon whether or not the customer is underpaid or overpaid) and they may be set at different levels dependant upon the year being reconciled.
The remainder of this subject is presented as follows
Underpayments due to PAYE rounding and informal tax calculations
Detailed information and instructions on underpayments can be found at PAYE90000 onwards. There are however occasions where the result of an end of year reconciliation is that the customer is underpaid (or overpaid) within the tolerance applicable to the year being reviewed and in these circumstances we do not issue a tax calculation or collect the underpayment as a matter of course.
You do not need to advise the customer of an underpayment that is within the tolerance unless
- The customer has requested a calculation
- You are issuing a notice of coding, form P2, advising the customer that their tax code has been reduced onto a week 1 / month 1 basis and that the underpayment which has arisen because of this, is to be recovered by a restriction in next year’s code
Where the customer asks for a calculation and reconciliation has already taken place you should write to the customer and explain that
- The tax due approximately equals the tax paid
- We do not normally issue a calculation in these circumstances
- If a calculation were to be issued, it would be likely to show a small underpayment because the operation of PAYE includes rounding in the customer’s favour which is then lost when a calculation is made
The letter should not include a calculation as the calculation has been made by the system and it is inefficient to do this again.
You can issue a calculation if the customer still requests it and in these circumstances, where the calculation was done as
- A single year reconciliation, you should issue the calculation by selecting the Issue Balanced Tax Calculation action link on the appropriate Tax Calculation screen. Details of the calculation issued will be sent to Accounting and the underpayment arising (however small) will be collected, usually though the customers tax code in the next year
- Part of a multiple year reconciliation, you should follow the guidance under the heading of ‘Multiple year reconciliations’ below
Tax calculation already issued
In cases where we have already issued an informal tax calculation, but further information is then provided and we need to revise the calculation, then any underpayment, however small, should be collected. This applies in single year reconciliation cases only. For a year that is being re-reconciled as part of a multiple year reconciliation, see below.
Tax calculation already issued - revenue error
In cases where we have already issued an informal tax calculation but are then advised that HMRC failed to act correctly on information held, consider ESC A19. See PAYE95000 onwards for further information.
Applying tolerances where several years are cleared together
Generally the tolerances must be applied to each individual year. If each year had been reviewed at the correct time, that year would have been ‘Reconciled - Balanced’ if the underpayment or overpayment were within the tolerances. The PAYE Service will apply tolerances to the earliest year first, and if the under or overpayment is within the tolerances, then that year will be ‘Reconciled - Balanced’ and the tolerances will then be applied to the following year and so on.
Where there is an overpayment greater than the tolerance for an earlier year, but in the next year there is an underpayment (for the year in isolation) that is within the tolerance, the later year will be ‘Reconciled - Balanced’ and the overpayment in the earlier year will either be
- Carried forward to the next year following the year ’Reconciled - Balanced’
- Where the ’Reconciled - Balanced’ year is the final one within the multiple year reconciliation, it will be repaid
Where reconciliation is triggered manually and both years are ‘Reconciled - Balanced’, an appropriate note should be made in Contact History where there is an overpayment for an earlier year, and an underpayment for a later year that is
- Greater than the tolerance without taking the earlier overpayment into account
- Within the tolerance if the overpayment (and supplement) is (are) brought forward
Where an underpayment for an earlier year is brought forward to a later year reducing any overpayment for that later year to within the tolerances, both years will be ‘Reconciled - Balanced’ and no tax calculations will be issued.
For multiple year cases, the PAYE Service will re-apply tolerances to a year being re-reconciled as part of multiple year reconciliation.
Over-repayment of tax / supplement
Where there is an over-repayment of tax / supplement, and the resulting over-repayment is less than the current tolerance, the tolerance should be applied and no further action should be taken to recover the underpayment.
Where we have already issued an informal calculation for an underpayment case and we find that there is a further underpayment, that further underpayment should be notified and collected regardless of the amount, (unless we consider that HMRC Delay, Extra Statutory Concession A19 would apply - see PAYE95000 onwards).
Multiple year reconciliations
You cannot use the PAYE Service to issue a tax calculation that has been balanced (within tolerances) where the year concerned was ‘Reconciled - Balanced’ as part of a multiple year reconciliation. You should not issue such a calculation as a matter of course during day to day work but, exceptionally, where a customer requests such a calculation you will need to prepare a Manual P800 letter using SEES where the customer is
- Underpaid, issue the calculation to either to the customer, agent or capacitor
- Issue a Manual P800 letter in SEES using the information from the calculation to complete and send it to customer, agent or capacitor
- Arrange for the appropriate manual Payable Order to be issued - see Action guide tax40031
After a year has been closed, where a potential underpayment (PUP) exists at the point at which reconciliation takes place, a compare will be done between the PUP and the reconciliation result. If the difference between a PUP coded and the result of the reconciliation is an underpayment / overpayment within tolerance, the PUP will remain in the current year code.
Multi-year tolerances have now been aligned with single year tolerances so they work in the same way.
Old process - when a multi-year rec is triggered, tolerances are applied to the difference between the new underpayment & the existing coded underpayment and the year is marked as balanced if within tolerance.
If a underpayment was classed as ‘Outstanding’, ‘Carry Forward’ or ‘Collected’ then tolerances would not be applied and any new underpayment would be added onto the original.
New process - if the amount is classed as ‘Outstanding’, ‘Carry Forward’ or ‘Collected’ the tolerances are applied and the year would be ‘balanced’.
Old process example
- In January 2013 a Potential Underpayment of £300 for 2013-14 is created & coded out in 2014-15.
- In August 2013, 2013-14 End of Year reconciliation establishes 2013-14 underpayment is £320. Tolerances are applied, £300 is accepted and year is marked as reconciled-balanced.
- In July 2014, 2014-15 End of Year reconciliation reconciles the account and carries forward the £300 from 2013-14 adding it to £500 from 2014-15. The £300 has already been collected through the code. The £500 underpayment cannot be coded out and a P800 is issued for 2014-15.
- In August 2014 – a change is received for 2013-14. A multi-year reconciliation is triggered and 2013-14 now shows as £322 underpaid. As the underpayment for 2013-14 is classed as ‘carried forward’ tolerances are not applied and £322 is accepted issuing a P800.
New process example
From April 2016 the 4th step will change. Tolerances will be applied if the amount is classed as ‘Outstanding’, ‘Carry Forward’ or ‘Collected’. If the underpayment is within tolerances the original amount will be accepted and the year would be ‘balanced’.
In August 2013, a change is received for 2013-14. A multi-year reconciliation is triggered and 2013-14 now shows as £322 underpaid. The underpayment for 2013-14 is classed as ‘carried forward’, tolerances are applied and £300 is accepted. A P800 is not issued.