Now taxman wants to take your money before you can even bank it

HM Revenue & Customs risked fresh public anger today with a "radical" plan to deduct tax directly from workers' pay packets.

Business leaders and MPs warned of further problems for the taxman after it emerged that it wanted to cut out employers from the tax system and use a centralised computer to award wages.

The HMRC, which has been heavily criticised for its handling of the tax "clawback" fiasco, has produced a discussion paper proposing that tax collection should take place centrally.

Michael Fallon, a senior member of the Treasury Select Committee, joined the CBI and Institute of Directors in warning against the plans.

Under the proposals, employers would no longer be responsible for deducting tax from workers and instead would give information on gross salary to the HMRC.

The Treasury agency, which admits the plan is a "radical option", would then deduct income tax and national insurance directly before the money was paid into worker's bank accounts.

But the HMRC is already under fire for its demands for billions of pounds of underpaid tax and experts are wary of another computer-related scandal.

About 1.4 million people are to be told that they owe the Inland Revenue a total of £2 billion in underpaid tax because of a calculation error.

In addition, many of those affected will have to pay interest on monies owed, even though the error is no fault of their own.

Mr Fallon told the Standard: "The HMRC have got to re-establish trust and confidence among taxpayers in the present system before they could even think about this kind of move to centralisation."

The CBI said it was "extremely sceptical" about the practicality of the idea.

Richard Bacon, head of taxation at the IoD, said: "This suggestion that gross pay might flow into a central computer, which would then pass net pay on to employees, is completely unacceptable. Sooner or later, the system would break down and some people would not get paid."

Accountants also called the idea a "frightening prospect". Clive Gawthorpe, partner at UHY Hacker Young, said: "Even if we had a tax authority that had proved it could work efficiently, there's only an outside chance that this would work."

A Government spokesman said: "The discussion document is designed to debate as many ideas as possible."