Now we all have to fear a tax demand after HMRC blunder 8 September 2010
James Coney (about the author)

Every family in Britain will be living in fear of a crippling tax demand following the admission by HM Revenue and Customs (HMRC) that it has bungled yet again.

Its declaration that 1.4 million people must cough up an average of £1,400 has placed a ticking taxbomb under their finances. Just 45,000 of the 1.4 million who owe tax have been told, leaving 1,355,000 totally in the dark until they receive the shock demand for next year.

And this could be the tip of the iceberg. HMRC has admitted it has another 17.8 million outstanding tax discrepancies and is working through these to see whether more tax is owed.

The last of the letters in the current batch of demands could arrive as late as Christmas and until the final one goes out no one can be sure they are not on the hit list.

Steven Jackson debt expert at beatmydebt.com expects the error will cause financial difficulty for thousands. "For many families, a reduction in income of £100 a month will be extremely difficult to absorb. There are hundreds of thousands of people who are currently struggling to ends meet and for them a massive increase in their tax payments will be a devistating blow. They are goig to need good debt advice and fast" he said.

Include tax debt in an IVA

HMRC, which has 23,000 staff ready to deal with problems, says it cannot send letters out faster for fear of being ' overwhelmed' with complaints and questions.

When the demands arrive, many families will feel forced to cancel spending plans or abandon next year's summer holiday.

These families will have an average £120 a month stripped from their pay-packet next year because of an almighty blunder with HMRC's new £389 million computer system. It will be a devastating blow to families who are already facing a crippling squeeze on their budgets.

However Steven Jackson said that the tax arrears can be treated like any other unsecured debt. "If people find themselves in financial diffculty they should get advice as soon as possible. If you have other unsecured debts and are considering carrying out an individual voluntary arrangement, any HMRC arrears you have can be included in this agreement" Jackson added.

Paddy Millard, of charity Tax Help For Older People, says: 'This chaos is going to hit pensioners the hardest. 'Demands for £4,000 will not be uncommon and people on fixed incomes simply cannot afford such sums.'

Many people already over £1000 a year worse off

As the Government battles to balance the books, many could already be more than £1,000 a year worse off as result of:

- A 1 percentage point hike in National Insurance from April 6;
- A massive cut in Child Tax Credit for middle-class families;
- Changes in tax thresholds that will force many more to pay 40 per cent tax; and
- An increase in VAT from 17.5 per cent to 20 per cent from January 1.

Meanwhile, many of those who paid too little tax will have had their benefits cut as a result, but while they will be asked to repay the tax, they may not be able to reclaim lost benefits.

Benefits affected include council tax, housing benefit, income support and pension credit - in fact, any benefit based on after-tax income.

Robin Williamson, technical director with the Low Incomes Tax Reform Group, says: 'Unfortunately, in many cases there is going to be no getting this money back that you missed out on. 'But it is absolutely vital that you tell your local authority or the organisation you get benefits from immediately if you are going to have a change in your circumstances.' This would include an increase in your tax bill.

HMRC blames employers

While it acknowledges some problems may be its fault, HMRC is also pointing the finger of blame at employers. It insists that in many cases employers will have failed to pass on the correct information about their employees.

But Sarah MacKinlay, editor of Payroll World, dismissed these claims. She says: 'There is going to be anger from taxpayers who thought they had paid the correct tax and find out they suddenly owe much more.

'Sadly, some of that anger is likely to be directed at their employer who is deducting the tax from their pay. 'But these employers have done everything right in making sure HMRC has got up- to- date records of all their staff, but the Revenue has just failed to use it correctly.'

HMRC does admit that many people will be entitled to Extra-Statutory Concessions because HMRC has simply failed to apply all the details it was sent correctly. HMRC has promised to be fair and deal with each case it is asked to review individually.

A spokesman says: 'Of course we will treat sympathetically anyone who has got big bills and are going to find them hard to pay. We will help them work something out.'