Direct recovery of tax debts—HMRC opens consultation

Direct recovery of tax debts—HMRC opens consultation
 Tax analysis: What are the key features of HMRC’s consultation on its plans for direct recovery of tax debts (DRD)? With legislation not expected to be introduced until Finance Bill 2015, now is the time for interested parties such as lawyers, banks and other deposit-takers to help shape the design of DRD.

Original news

Government consults on recovery of tax debts direct from bank accounts, LNB News 06/05/2014 116

HMRC is consulting on proposed new powers allowing it to recover a range of assessed tax debts directly from the bank accounts of businesses and individuals who have ignored repeated requests for payment. This action would only apply to debts over £1,000 and would include such safeguards as leaving a minimum of £5,000 in the debtor's account. The proposal was announced at Budget 2014 and the consultation will run until 29 July 2014.

The full consultation can be viewed here.

What does the consultation document on direct recovery of tax debts say?

On 6 May 2014, HMRC and HM Treasury opened the consultation on DRD. DRD will enable HMRC to recover tax (including NICs) and tax credit debts (together referred to as tax debts) directly from debtors' bank and building society accounts, as well as ISA accounts, if the debtor owes at least £1,000 (which could be made up of smaller debts owed across a range of taxes) (see chapter 1 and para 3.2 of the consultation). DRD was first announced at Budget 2014. The intention is for legislation on DRD to be included as part of Finance Bill 2015.

The DRD consultation document outlines:

the policy aim of DRD (chapter 2 )

how DRD is envisaged to work in practice (chapters 2 and 3), and

the safeguards to protect tax debtors from unduly harsh treatment (chapter 4)

The consultation asks taxpayers, deposit takers and those representing the vulnerable for their views on the DRD plans—in particular, whether the proposed safeguards are appropriate given the need to balance HMRC's right to recover tax debts in full as efficiently (time and cost-wise) as possible and debtors' rights not to suffer undue hardship as a result of DRD.

Who is DRD aimed at?

In the foreword to the consultation, David Gauke, the Exchequer Secretary to the Treasury, notes that:

'The Government recognises that there are concerns about the impact of this change on vulnerable members of society. We must ensure that there are strong safeguards in place so that this is only targeted at the truly non-compliant. That is why we are proposing to only use this power against a small core of taxpayers who owe significant debts of over £1,000 and have sufficient funds in their accounts to pay. Furthermore, we are proposing to leave a minimum of £5,000 after the debt has been recovered, ensuring that this does not create unnecessary financial trouble for those affected. We are also proposing additional checks and procedures.'

The consultation makes it clear that DRD is aimed at those debtors:

who are in a position to pay their tax debts but choose not to, or delay payment for as long as they can, and/or

who deliberately avoid engaging with HMRC (para 2.10)

HMRC estimates that DRD will only apply to around 17,000 cases a year (para 2.12).

What will DRD apply to?

DRD will apply to tax debts whether they are owed by individuals, businesses (including companies) or partnerships (para 3.3).

For this purpose, tax debts encompass:

unpaid taxes (including corporation tax), NICs and duties

overpaid tax credits, and

interest and penalties for late payment of tax (para 2.2)

What are the safeguards?

Although the consultation covers the process of DRD in chapter 3 and the safeguards in chapter 4, the process for applying DRD and the debtor safeguards are intertwined.

The safeguards proposed by HMRC include:

DRD only being applied to tax debts established as due (ie, where the due date for payment has passed) where the tax debt or the aggregate of tax debts owed by the tax debtor equals at least £1,000 (para 4.3)

DRD not being applied until:

the debtor has been contacted a minimum of four times to request payment—where a debtor has a good history of compliance, it is likely they will have been contacted up to nine times before DRD is used (paras 3.4 and 4.2)

a clear match has been found between the debtor and an account or accounts (para 3.7)—HMRC proposes to:

contact the relevant bank or other deposit taker to request information about the debtor's accounts (current, savings and ISAs) and proposes that the deposit taker should, within five working days, provide 12 months of the debtor's account history in respect of the relevant account(s) (para 3.12), and

use the account history to determine how much money should be held (ie frozen) and ultimately paid to HMRC (paras 3.9–3.11)

HMRC has reviewed the case (including checking that the tax debt is still due) and authorised DRD action (para 3.8)

the debtor has been notified of the fact that DRD will be used against their account(s) (para 4.4), and

the expiry of 14 calendar days following the debtor being notified that DRD will be used against its account(s)—during this 14-day period:

the debtor's account is put on hold (ie frozen), although the debtor will still have access to some of the money in the account to pay for essential living or business expenses (para 4.6), and

the debtor still has the right to object to HMRC or provide evidence of hardship and potentially set up a time to pay arrangement or to appeal the use of DRD to the tribunal (paras 4.4 and 4.5)

where the account is jointly held with someone other than the debtor, the joint account holders will be protected through pro rata safeguards and the fact that notification will be provided to all joint account holders and each joint holder will be able to object or appeal the DRD (para 4.7)

a specialist HMRC team will be responsible for all DRD cases (para 4.3)

a dedicated helpline will be available to debtors and deposit takers (para 4.3), and

the ability for debtors to appeal the use of DRD (paras 3.5, 4.4)

after DRD has been applied, a minimum amount of £5,000 must be left across the debtor's accounts—this may well mean that the entire tax debt may not be satisfied by a single lump sum DRD payment, but sometimes require regular deductions to be made from the account(s) so that the tax debt is paid by instalments (paras 3.19 and 4.6), and

if money has been transferred out of an ISA account in error under DRD, HMRC 'will ensure that funds are replaced and that the account holder does not suffer any loss of their tax free limit for the year' (para 4.8)

Are the safeguards adequate?

The proposed safeguards sound reasonable. However, given that the detail of how they will be implemented and upheld has not yet been published, it remains to be seen how well they can be translated into legislation and, ultimately, how successful they will be in practice.

One question that comes to mind is how will HMRC know what funds will be required by a debtor for essential living or business expenses. The proposal envisages that HMRC will have sufficient information on a debtor's financial circumstances to prevent HMRC from inadvertently causing hardship for the debtor when applying DRD to the debtor's accounts (paras 3.11 and 3.14). This assumes that HMRC will have the capacity (even with the use of computer programmes) to analyse each debtor's financial circumstances (including 12-months' worth of account history on potentially multiple accounts) in order to gauge what would be the appropriate amount of a debtor's funds to hold or freeze and ultimately to pay to HMRC. Helpfully, the consultation states that HMRC will try to recover tax debts from accounts that 'appear to be used primarily for savings over those that appear to be used for day-to-day expenses' (para 3.15), but this divide will not always be so clear.

How will DRD be administered?

Given that DRD involves direct recovery of tax debts from debtors' bank and building society accounts, some of the administrative work will need to be carried out by the bank or building society (or other deposit-taker) where the debtor has its account or accounts.

It is the deposit takers that will have to:

provide financial information on the debtor, including 12-months' worth of account history, in respect of a debtor's accounts with that institution within a tight timeline, currently envisaged to be five working days

freeze a debtor's bank account (or at least a part of it) as instructed by HMRC, and

unless the debtor has contacted HMRC to arrange an alternative payment method (which may well include time to pay arrangements), pay the frozen or held funds to HMRC on expiry of 14 calendar days from the day when the funds were first put on hold

Acknowledging that DRD will mean co-operating with deposit-takers, the consultation specifically asks them:

whether five working days will be sufficient to enable them to provide financial information on debtors, including 12-months' worth of account history (question 2)

what changes they will need to make to their systems to administer DRD (question 4)

what time limit would be suitable for them to comply with an order to release held (ie frozen) funds to either the debtor or HMRC (question 6), and

what sort of sanction should be applied to those that fail to comply with a notice to supply HMRC with a debtor's account information or to release the held (ie frozen) amount to HMRC (question 7)

What next?

Given that the government is currently consulting on the DRD proposal and the legislation will only be included as part of Finance Bill 2015, now is the chance for interested parties such as lawyers, banks and other deposit-takers to let the government know their views on the proposals and help shape the design of DRD. The deadline for submissions is 29 July 2014.

Sabina Margulies, solicitor in the Lexis®PSL Tax team

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.