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Guest Blog: Direct Recovery of Debts – New HMRC Powers

Guest Blog: Direct Recovery of Debts – New HMRC Powers

This blog has been prepared for mlm Solutions by Adrian Wood of Adrian Wood VAT Consultancy Ltd.

Are you aware that draft legislation is due to be considered by the UK Parliament which, if passed, would allow HMRC to remove money directly from a taxpayer’s bank account?

Read on...

On 5 August, HMRC published their Briefing, entitled “Direct Recovery of Debts” (DRD), which outlined the Government’s proposals to introduce powers to allow HMRC to access funds from a tax debtor’s bank account, where they don’t pay voluntarily.

In brief:

  • These proposed provisions will apply where there is an underpaid tax liability or an over claim of tax credits, provided that the debt is at least £1,000 and the removal of funds by HMRC from the debtor’s bank accounts will not bring the bank balances below £5,000.
  • Prior to any deduction, HMRC will have a face to face meeting with the debtor.
  • Once HMRC have instructed a bank to hold money in an account and have notified the tax debtor, they will have a period of 30 days to reconsider their decision. An appeal can also be made to a county court on specified grounds, including hardship and third party rights.

The Government state that the DRD provisions are aimed at tackling those who owe tax and, whilst these debtors have the means to pay the tax, they choose not to do so. In the 2014 tax year, approximately 10% of tax amounting to £50 billion was paid late. The Government estimate that there will be 11,000 DRD actions per annum.

These DRD powers were first mentioned by George Osborne in his 2014 Budget. Following the Budget announcement, there was a consultation exercise, with the results of this being published in November 2014 in a Summary of Responses Paper.

Surprisingly, there were only 124 responses to the consultation exercise, with 68 of these coming from individuals. Of the 56 responses from non individuals, only one bank responded – ironically, this was the Lloyds Banking Group which is 25% owned by Treasury! The largest representation came from accountancy firms, where there were 18 responses, including three of the “Big Four” firms.

The consultation raised concerns about these proposed powers and the Government made some welcome changes to their original plans.

For example:

  • As stated above, each debtor will now receive a face to face visit from a specially trained HMRC officer prior to any recovery through DRD, plus there will be a specialist unit within HMRC’s Debt management Unit to work with tax debtors who are identified as being vulnerable.

However, what happens if a debtor resists a face to face meeting? How effective will HMRC be at identifying cases of vulnerability?

  • The appeal period between the date on which HMRC intimates that it has initiated the DRD will be 30 days rather than the originally proposed 14 day period.

Whilst this extension is welcomed, it will only be of use where HMRC act sensibly and sympathetically. In my long experience of VAT, it is seldom the case that any internal HMRC review of an earlier decision reaches a different conclusion!

  • In order to avoid the risk of a tax debtor deliberately withdrawing funds in advance of HMRC initiating DRD action, the Government had proposed to require banks to provide 12 months account data to allow them to consider the subject of hardship. However, in light of respondents’ concerns about privacy, this requirement has been dropped and HMRC will merely be entitled to look at current balances.

I’m not sure that this is a positive step and wonder if this will result in the DRD being less effective and more costly to operate?

  • A number of respondents had raised concerns about the potential interaction of DRD and insolvency proceedings and the possibility of tax debts taking precedence over higher ranking debts. The Government have given an undertaking that HMRC will not receive an unfair advantage in the case of an insolvency, with this being achieved through effective legislation.

This is a welcome change. Let us hope that the legislation is effective and that we don’t return to the pre 2002 position where tax was recovered at the expense of other higher ranking debts.

In Summary:

I consider that this potentially is a welcome step to recover tax debts from those who play the system.

Whilst payment of such outstanding tax is good for the economy and should be pursued with vigour, it is important that these powers are not used inappropriately. I have listed some concerns above, plus I have concerns that these new powers may result in HMRC being less willing to agree Time to Pay Arrangements, which are often a lifeline for struggling businesses and individuals.

For more information:

The 5 August Briefing can be accessed HERE and the November 2014 Summary of Responses Paper can be accessed HERE

Adrian Wood

26 August 2015

Adrian Wood VAT Consultancy Ltd

Head Office: 4 Flemington Court, Strathaven, Lanarkshire, ML10 6FL

T: 07771 777 903

E: adrian@adrianwoodvatconsultancy.co.uk

W: www.adrianwoodvatconsultancy.co.uk

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