The scam the Government uses to rob your children

This scam is so obscure that top tax experts from leading accountancy bodies admitted they had never heard of it. And it is made even worse by the Revenue's refusal to do anything about it when it receives complaints.

Her Majesty's Revenue & Customs – the grandiosely relabelled taxman - has been under attack for its incompetent handling of some six million pay as you earn tax bills. Around 1.4m will have to fork out hundreds of pounds a month in extra tax while others will collect smaller refunds. Read Tax code error in your favour: Collect £££ to find out more details.

HMRC deserves every millilitre of vitriol thrown at it – and then some more.

For it also operates a scam that targets 16 year olds with savings in the bank or building society – teenagers more concerned with exams than examining Revenue rules and more interested in Facebook than HMRC's faceless wonders.

What I am going to describe is perfectly legal. But a scam is a practice so sharp that no normal person would ever discover it until they lose out . This scam on teenagers I am about to reveal is so obscure that top tax experts from leading accountancy bodies admitted they had never heard of it. And it is made even worse by the Revenue's refusal to do anything about it when it receives complaints.

Teenagers lose out

The scam hits those 16 year olds who receive interest on their savings tax free. In all probability, either they or their parents filled in form R85 (PDF) at the bank or building society. This allows the savings firm to pay interest without losing the 20% tax others have to pay. Basic rate taxpayers see every £100 of gross interest cut to £80 after tax. Anyone with low or no income can sign R85.

When you fill it in, you agree to inform the Revenue if your income goes into taxable territory. And you must fill in a new form every time you open a new account. The form applies to all ages – not just children and teens. HMRC has spent millions publicising this facility over the past decade.

But read the adverts, the form and the help notes as much as you want and that is it. There is no indication that deep in the bowels of tax legislation, a small print clause automatically ends tax-free interest payments at 16.

This is the scam. While 16 year olds are doing what 16 year olds do, the amount of interest they earn has been cut by a fifth – unless they sign form R85 all over again. This would then last until they pass the personal allowance limit – currently £6,475.

The Revenue does not tell them to fill in a new form. Their bank or building society does not warn them. They are on their own.

Rip up your R85

The only reason I know is that it happened to both my children. We are still struggling with the Revenue's crazed bureaucracy to get the overpaid tax back for one of them via form R40. Oddly, the Revenue seems far slower in giving back than in fining those who transgress by even a minute on self-assessment deadline days.

Tax experts tell me they have never heard of this “rip up your R85” rule. And they think – like me – it's a disgrace to take money from youngsters in this way.

The Revenue press office states that everyone can find out about this end of R85 tax freedom because it is on their website. Yes, it is. I have seen it.

But have you ever tried searching for anything on this site? Its internal search engine is a non-search engine, and who, outside the Revenue, imagines sixteen and seventeen year olds spending surfing time on the HMRC website. Get real. They don't. Nor does anyone else unless they really have to.

And – one for lovemoney.com's philosophers - why would and how could anyone search for something that they did not even know existed?

HMRC told me: "We rely on banks telling 16-year-olds that their R85 will be cancelled and inviting them to submit another form.” Sorry. This is total nonsense. The banks don't do it – and why should they have to deal with a nonsense rule anyway?

It's a scam because it unjustly makes money for HMRC, the Revenue is worse than a mobile phone call centre in India at offering refunds, and, worst of all, the victims are vulnerable people, still legally children.