In a report by the BBC, revenue employees stated that the new system, in numerous cases, cannot be relied upon to generate the correct tax codes and the general feeling is that this situation is getting worse, not better.

An employee, who wished to remain anonymous, claimed that the testing of the new system was inadequate – it stopped short of issuing new tax codes, the point at which the system has gone wrong.

The Revenue denied this claim. It said: “Annual coding was subjected to rigorous testing, with approximately 10,000 cases, covering in excess of 500-plus different scenarios. The data was tested as live and showed the system was working correctly. HMRC did not issue tax codes but checked the data and ensured that the correct code would have been issued to customers.”

Despite the HMRC’s claims, small businesses must be vigilant in ensuring tax codes are correct to avoid unnecessary penalties.

In addition to potentially suffering unnecessary charges, the changes in the system will effect small businesses in a number of ways: Companies with fewer than 50 staff no longer have a PAYE paper filing option. With the PAYE deadline on 19 May, employers must register with HMRC to file online – HMRC’s is supplying free software in order for small businesses to file their employee data securely.

Stephen Banyard, director of the business customer unit at HMRC, says: ‘Major changes to PAYE filing and payment are only a matter of weeks away, so employers need to make sure they’re well prepared for them. We will be writing to affected employers over the coming weeks.’

In addition to changes in filing, from May 2010, the tax office is also introducing new penalties for late payment of PAYE. This includes income tax, national insurance contributions (NICs), student loan deductions and construction industry scheme deductions.

Employers who think they may have difficulty paying should call HMRC’s Business Payment Support Service on 0845 302 1435. If HMRC agrees time to pay, it will not charge late payment penalties. More information on the new penalties can be found on the HMRC website, www.hmrc.gov.uk.

If you are worried about tax coding issues or changes to the new system, join me for my regular question and answer session on Twitter, next Tuesday at 11am.

Blamed on HMRC’s new computer system, the blunder could see individuals hundreds of pounds short, depending on the level of their earnings.

Andrew Hubbard, president of the CIoT, warned advisors and their business clients to check their new codes. “Most people on PAYE are used to assuming that what the taxman sends them is correct, (filing) away coding notices without bothering to check them.

This year, many of them are being given wrong information, and unless they spot it and tell HMRC, their employer will receive the wrong information too and the employee could get a nasty shock when they open their April pay packet and see it is as much as £100 lighter than they expected.”

Richard Mannion, director of national tax at Smith & Williamson, said that HMRC’s previous system had suffered problems in the past. “They’ve now installed a new system, which is more flexible, but they are having teething problems.”

The mistake is likely to significantly affect pensioners with part-time jobs or people who hold down more than one job, as the system is likely to generate a different tax code notice per job.

People with investment income may also be affected as the HMRC tries to collect tax due on individuals’ estimated investment income, such as bank interest, dividends and rental income, through their tax codes. In many cases this will be based on previous tax returns and may be excessive and out of date.

To avoid undue taxes, all employees must check their tax code and contact HMRC if it needs to be changed. For more information about understanding your tax code visit: www.hmrc.gov.uk/incometax/codes-basics.

A HMRC spokesperson insisted that “the new system is working as it should…as part of our transition to this new system, in the first year, we also expect some of the codes we issue to be incorrect. Anyone in this position should call HMRC to make sure the right tax code is applied.”