25. Incorrect guidance and failures by local HMRC offices to implement agreed procedures has meant the Department has not been collecting income tax on certain small pensions in line with Pay As You Earn regulations. This issue dates back to the early 1980s but the Department only became aware of the problem in 2005. It changed its guidance, but it did not write to pension providers to alert them to the changes. As a consequence the changes went unnoticed and were not implemented. Some local tax offices allowed pension providers to continue their previous incorrect agreements even when the providers queried the changed instruction.

26. The Department estimates it may not be receiving income tax from 420,000 pensions with a tax loss of around £135 million per annum. It has now begun work to put these pensions on a proper footing but it does not intend to recover tax which was not been deducted in years earlier than 2007-08. Pensioners affected will have started to accrue debts from April 2007 and the Department will start to collect these amounts from April 2008. It may take longer to identify some pensioners.

27. The Department has considered writing to pension providers to try to identify those most likely to be affected. It explained that any requirement it placed on pension providers to provide it with information could only be voluntary, which could lead to only those pensioners where their provider had provided information being approached.[24]

28. The Low Income Tax Reform Group have pointed out that the Department's approach could leave some 420,000 pensioners affected unaware they have a liability until 2008-09.[25] It has also expressed concern that the decision to recover unclaimed tax back-dated to April 2007 might deprive people of the opportunity to make claims to the Department of Work and Pensions (DWP) for adjustment to their pension credit entitlement. The Department are in discussions with the DWP to overcome this problem by extending entitlement to pension credit.

25   Q 75; Ev 21 Back