More than 400,000 Scottish taxpayers did not receive a notification letter from HMRC in December last year due to an error in the design of an automated identification exercise, the UK’s spending watchdog has found.

NAO warns HMRC to keep its records up to date – Photo credit: Flickr, Ged Caroll, CC BY 2.0

According to the National Audit Office, the UK’s tax authority needs to ensure it maintains accurate databases of Scottish taxpayers if it is to effectively administer the new Scottish Rate of Income Tax, which came into force in April this year.

Under the Scotland Act, the Scottish parliament has been granted the power to change the income rate paid by Scottish taxpayers, and for the 2016-17 financial year, Scottish taxpayers will pay 10% less than the UK’s basic, higher and additional income rates.

In its report into The Administration of the Scottish Rate of Income Tax 2015-16, the NAO said that an error in HMRC’s identification processes led to 420,000 potential taxpayers receiving no information about changes to their annual tax code. Some 2.45 million people did receive such information.

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The report said that HMRC asked its IT supplier to investigate the issue in January 2016, and that a permanent IT solution was implemented in October this year to bring these taxpayers into HMRC’s automated processes in the future.

“HMRC believes the IT solution it implemented in October 2016 is the long-term means of addressing issues that arose during 2015-16 that suggested its records of Scottish taxpayers were initially incomplete,” the NAO stated.

“If this solution works as intended, we believe this will be a significant step in HMRC being able to monitor and assure the accuracy of its Scottish taxpayer population,” it said, before adding that it would assess the effectiveness of this approach in its report on 2016-17 activity.

However, it noted that the initial error could have longer-term effects, saying that, “by not issuing the same level of information as the 2.45 million taxpayers originally identified in December 2015, HMRC may have created a less informed group of taxpayers”.

A further risk to HMRC is the ability to provide an IT solution that allows personal pensions providers to claim relief at the source.

“HMRC’s most significant challenge in providing the correct taxpayer status is data matching,” the report said.

“At present, the quality of pension providers’ data is not sufficient to allow automatic data matching on the scale required. HMRC has strategies in place to mitigate these risks and is working closely with the pension industry to deliver the solution required for the relief at source system to accommodate the Scottish Rate of Income Tax.”

Elsewhere in the report, the NAO noted that HMRC spent £1m on communications with potential Scottish taxpayers about the Scottish Rate of Income Tax, with one of the messages being the importance of taxpayers updating their address details.

The NAO said that if this information is not kept up to date, HMRC’s ability to assure the amount of tax collected for the Scottish government “will be undermined”, urging the tax authority to “continue to communicate this key message” in the future.