ICAS responds to proposals to extend HMRC’s powers to tackle smaller tax debts

We have responded to proposals that would significantly extend HMRC’s existing powers to take money directly from taxpayers’ bank accounts where they have unpaid tax debts.

In this earlier article, we outlined plans to increase HMRC’s powers for tackling lower value tax debts. 

Our response to the consultation supported the stated objective, which is to allow HMRC to recover debts from those who can pay but refuse to do so. However, we expressed serious concerns about the proposed process, particularly the potential impact on taxpayers who need extra support. If the proposals are implemented, we believe there should be additional safeguards, including a face-to-face visit for individuals and a longer notice period. 

Debtors needing extra support

As the consultation mentions, HMRC may not always know if someone requires extra support, particularly if they haven’t engaged with HMRC. We also understand that even where HMRC has been told about extra support needs, there isn’t a single record where this could be checked – there may be a flag in one HMRC system but not others.

Unfortunately, many individuals who need extra support will struggle to engage with HMRC. The most vulnerable are the most likely to ignore letters, particularly in the context of debts they feel they can’t pay.

The main proposal for addressing this appears to be the inclusion of a ‘clear prompt’ in the Pre-Deduction Notice (‘PDN’), instructing recipients that if they are in a “particularly difficult personal situation, or require extra support, they should contact HMRC immediately.” 

We don’t believe this is an adequate safeguard. It may not make any difference, if earlier communications have been ignored, particularly as the proposed 14-day notice period is inadequate to allow the recipient to seek advice/support. A better approach would be to mandate a face-to-face visit before instructions are passed to the deposit taker. This would also bring to light cases where HMRC used incorrect contact details, so communications have not been received. 

A face-to-face visit would be a good safeguard for all individual debtors but should, as a minimum, be mandated in any cases identified for manual review (to check for potential support needs). 

Notice period

We noted that the 2019 review of HMRC’s existing Direct Recovery of Debts (DRD) powers makes clear that the majority of cases are resolved without the need to take money directly from bank accounts. The earlier stages of the process prompt payment in most cases. 

In the proposed new process, we anticipate that the PDN would similarly prompt engagement with HMRC (including payment) in many cases, so it is essential that the notice period is longer than the proposed 14 days, to facilitate this. It should be at least 30 days, but without stronger safeguards, we suggested that 60 days would be appropriate. This would give taxpayers (particularly vulnerable ones) the opportunity to seek help to engage with HMRC.

Other points addressed in our response included: 

Interaction with the existing DRD process

HMRC must clarify the interaction between the proposed new process and the existing DRD process. HMRC shouldn’t be able to use both in the same case. It should be transparent and set out the criteria it will apply to determine which process to use.

Joint accounts 

The consultation proposes that joint accounts will be within scope for the extended DRD process where no sole account exists, or the sole account has insufficient funds. We believe that joint accounts should only be in scope if the process is revised. As the proposals stand, there is no meaningful protection for the non-debtor holder(s) of a joint account. 

If joint accounts remain within scope, HMRC should be restricted to considering only the debtor’s share of the money in the account(s). We understand that currently, HMRC intends to treat all the money as available, even though it doesn’t all belong to the debtor. 

The consultation states that the non-debtor will be able to object to the deduction, but they won't be able to exercise this right if they don’t know that HMRC proposes to take money from the account. As currently proposed, the PDN is only issued to the debtor. If joint accounts remain within scope, the non-debtor should be formally notified by HMRC before the deposit taker is contacted by HMRC (and before any money is taken), so that they have a genuine opportunity to object. 

Established debts

We agreed that only established debts should be within scope and that debts still in the standard collection cycle should be excluded. However, in practice we receive reports of HMRC pursuing debts that aren’t established (and in some cases don’t exist) – to the point (in some instances) of HMRC’s Debt Management staff visiting the taxpayer. 

The reasons for these problems vary but include HMRC errors, known problems with VAT central assessments, penalties under appeal (but still pursued), tax under appeal that has been postponed (but HMRC still tries to collect it), debts already paid (but demanded again, apparently due to lack of integration of HMRC systems), issues with incorrect VAT and PAYE accounts and HMRC delays in processing repayments and set-offs. 

It can be very difficult for agents and their clients to have the debt collection process put on hold while the underlying problem is resolved. In some cases, one part of HMRC confirms to the agent/taxpayer that the debt is not due/demands can be ignored, but Debt Management continues to pursue the money through demands and visits – sometimes over long periods.

HMRC wouldn’t intend these debts to be in scope for the proposed new process, but what is already happening in practice indicates that there’s currently no reliable mechanism for excluding them. This problem needs to be addressed anyway, but the new process shouldn’t be introduced until it is fixed.

Affordability 

The existing DRD process requires HMRC to leave £5,000 in bank accounts. One of the reasons behind the current proposals is to give HMRC greater flexibility through the use of instalment payments. However, we don’t believe that the process as currently proposed will enable HMRC to achieve the accuracy that would be necessary to make payments affordable and manageable.

HMRC intends to rely heavily on information provided by Credit Reference Agencies (‘CRAs’), coupled with information it already holds (for example, PAYE and self assessment records) to determine affordability and establish the appropriate length for an instalment plan. 

PAYE information could be helpful, but self employed income may fluctuate considerably. It also seems unlikely that CRAs will be able to provide sufficiently detailed and robust data to permit HMRC to adequately tailor instalment plans in all cases. It’s particularly difficult to see how HMRC could ensure that deductions don’t exceed 50% of disposable income. 

It would be preferable for HMRC to improve the proposed process to ensure that more debtors choose to engage, and could provide detailed information on income and outgoings (as they do for Time to Pay arrangements). 

Let us know what you think

We respond to tax consultations and calls for evidence and attend meetings with HMRC at which service levels, delays and other issues you raise with us are discussed. We welcome input from members to inform our work; email us to share your insights and feedback.