Direct Recovery of Debts
In the 2014 Budget HMRC’s proposals to have the ability to recover tax and tax credit debts from those who refuse to pay directly from their bank accounts were announced.
Examples of the type of debt that will be covered by Direct Recovery of Debts (DRD).
- Tax debt owed by individuals (eg. Income Tax, VAT owed by tax payers in self-assessment).
- Tax credit debt owed by an individual who has received overpayments of tax credits eg. Child Tax Credit or Working Tax Credit.
- Taxes owed by businesses or partnerships (eg. unpaid Corporation Tax & PAYE).
- DRD will only apply to debts of over £1K.
How DRD will work
HMRC will use a targeted response to recover an outstanding debt, depending on the type of debtor and debtor’s situation. They will attempt to make contact with the debtor between 4-9 times, but it should be noted that a Notice to File a Return, Return Reminder and Penalty Notice will all count as contact even though at those stages a debt doesn’t even exist!
At any stage in the process the debtor can contact HMRC to pay in full, agree a Time to Pay Arrangement or query the amount owed. If no contact is made the debt can be considered suitable for DRD action to be used.
The DRD process
- HMRC checks to see how much a debtor has in his bank accounts and verifies the information with relevant banks.
- HMRC will leave a minimum of £5,000 in a debtor’s account after recovery of the debt for day to day expenses.
- HMRC will contact the debtor to advise them that a hold has been put on any funds in their bank account(s) in excess of £5,000 and up to the value of the outstanding debt. The letter will urge the debtor to make contact immediately.
- If no contact is made within 14 days HMRC will apply for the funds in the bank to be transferred to settle the outstanding debt.
Earlier this year the Institute of Chartered Accountants in England & Wales (ICAEW) wrote to HMRC expressing their concerns about plans for HMRC to claim back unpaid tax directly from people’s bank accounts. The ICAEW has no sympathy for those who do not pay taxed owed, despite having the means to do so and support HMRC in its task of collecting such debts, but it believes that recovery powers must be fair, proportionate and accompanied by robust safeguards.
The ICAEW’s main objections to the DRD proposals are:-
- HMRC should not have the power to collect debts from bank accounts without independent judicial oversight.
- They are not convinced the power is necessary in addition to those already at HMRC’s disposal and feel that they should be asked to provide much better evidence as to why the current powers are inadequate.
- They are concerned about the risk of errors on HMRC’s part, which could have damaging consequences for both the taxpayer concerned and also for public trust in the tax system. As we all know HMRC is under-resourced which results in mistakes; only a few weeks ago it was revealed that more than 5 million British workers face uncertainty after leaked emails revealed that their tax bills for last year may have been miscalculated.
The CIOT, ATT, AAT, ACCA, FSB, Forum for Private Business and others have also expressed concern about “raiding somebody’s account before a court case.”
There is also the concern that if this is permitted for HMRC, other government departments may ask for the same right.
It is believed in its current format the new legislation will be slipped in under the radar in 2015 between Budget Day (March) and the General Election (May).
There is currently an e-petition to withdraw the proposals to introduce direct recovery of tax debts from taxpayers’ bank accounts in Finance Act 2015 in order to give more time for the policy to be re-thought and consulted upon. You can sign the petition via the link below.