Should HMRC have greater powers to collect tax debts directly from bank accounts?

HMRC’s powers to take payments for tax debts directly from bank accounts may be extended.

Consultation on tackling lower value tax debts

HMRC already has ‘Direct Recovery of Debts’ (DRD) powers introduced in 2015. These allow it to recover unpaid tax directly from bank accounts but with some limitations. It can only take a one-off lump sum payment and must follow a case-by-case manual process.

The government is now proposing to introduce an automated process that would allow HMRC to “directly deduct instalment payments from those customers with lower value debts who persistently do not engage with HMRC.” 

What would the process look like?

Standard collection steps

1. HMRC would follow its usual approach to collecting a debt, ie contacting the taxpayer and offering support where appropriate, such as a Time to Pay (TTP) plan.
2. If the payment isn’t made and the taxpayer doesn’t engage with HMRC, the debt may be pursued through visits and the use of debt collection agencies.
3. Once these standard collection processes have been exhausted, the new direct recovery powers could be used in appropriate cases.

Pre-Deduction Notice (PDN) 

Before any deduction action, HMRC would issue a formal PDN to the taxpayer, which could include:

• A detailed breakdown of the debt being recovered (including any interest and penalties due).
• The proposed instalment payment plan and monthly amount.
• The date instructions will be issued to the financial institution to commence deductions.
• Confirmation that no deductions will be made until a notice period has expired.
• Clear communication that HMRC is responsible (not the financial institution) and any queries should be raised with HMRC.

The PDN would also include clear guidance on how to respond by:

• Paying the debt in full.
• Contacting HMRC to disclose extra support requirements.
• Contacting HMRC to arrange a TTP plan.
• Raising an objection to the PDN. 

 The government proposes a ‘notice period’ between issuing the PDN and the first deduction and would like views on whether 14 days would be sufficient.

If the customer doesn’t respond to the PDN, HMRC would send a deduction instruction to the financial institution digitally, setting out the (monthly) instalment payments to be taken from the account and paid to HMRC. The consultation notes that the government will work with the institutions to optimise this process.

Other features of the proposed process

• Debts and customers in scope. The consultation proposes that the process would apply to individuals and companies with lower value, established tax debts across all HMRC tax regimes. However, some taxpayers and debts will be out of scope, including:
  o    Debts that are under active appeal or enquiry.
  o    Recent debts still subject to standard collection processes.
  o    Taxpayers already in an arrangement or enforcement process (eg a TTP plan or a charging order).
  o    Customers without an identifiable UK bank account.
  o    Deceased individuals or insolvent businesses or individuals.
• Taxpayers with multiple accounts with different providers. In these cases, the government is exploring the use of data from credit reference agencies to decide which account should be targeted. If deductions repeatedly fail, HMRC would consider using an alternative account.
•  Joint accounts. These will only be considered for direct deduction where no sole account exists, or a sole account has insufficient funds. If a deduction is made the non-debtor would have a right to object in certain circumstances (although it’s unclear how they would be informed about the PDN or any appeal rights).
• HMRC errors. A customer will be able to notify HMRC if they identify a factual or procedural error through a streamlined objections process.
• Higher value debts will be excluded. The government wants views on whether a cap of £10,000 for companies and £5,000 for individuals (inclusive of interest and penalties) would be appropriate.

Safeguards

The new process will include safeguards, which fall into three categories:

Customers requiring extra support

These individuals would be excluded from the extended DRD powers. HMRC would use their existing definition which refers to “someone who cannot deal with their tax affairs or engage with HMRC in the standard way due to a severe or chronic mental or physical health condition, learning difficulties, recent bereavement or other personal circumstances.” Financial hardship alone would not necessarily exclude someone.

The consultation recognises that HMRC might not always be aware that someone needs extra support. Options for identifying individuals with extra support needs could include:

• Additional data from other government departments or financial institutions. Claiming certain government benefits might indicate a need for extra support. Financial institutions have a duty to look after their customers, so could be asked to alert HMRC to special needs. However, both these options raise privacy considerations and might not always be accurate. 
• Manual review. Where potential extra support needs emerged once the process had started, cases would be paused for examination by a trained HMRC reviewer. Based on the outcome of the review, cases might be diverted to specialist support, the terms of the PDN could be amended or the case could proceed without any adjustment.

Affordability 

The government intends that using instalment payments (rather than lump sums) would help to ensure payments are affordable and manageable. The design of the new process should support this intention:

• When setting up TTP plans, customers must provide HMRC with information about income, expenditure and assets to establish what they can afford to pay. This won’t be an option for the extended DRD process which will apply to customers who have not engaged with HMRC. The government is considering the use of data from other sources to allow HMRC to decide what would be affordable: 
  o    Credit reference agency data (for example, affordability banding) to be used as an indicator to inform HMRC’s assessment.
  o    HMRC’s internal data. For individuals, this could include PAYE records or self-assessment returns. For businesses recent turnover figures or VAT returns could be considered.
• Instalment plan length and flexibility. The government is considering applying HMRC’s usual affordability principle (for TTP plans) ie generally no more than 50% of disposable income can go towards repaying the debt. It isn’t clear how this could be established accurately.

The consultation requests views on how best to structure plan lengths and the factors that should be considered.

Objections, appeals and complaints 

Objections and appeals

When a debtor receives a PDN there would be a right to object, but this would only be available in limited circumstances:

• Factual or procedural error by HMRC.
• The process would cause financial hardship, or the customer needs extra support.
• The funds in the account belong to a third party (including non-debtor joint account holders).

Objections could be made at any point after the issue of the PDN until the final instalment is collected – to allow for potential changes in circumstances. They would be reviewed by an ‘independent’ HMRC officer (ie one not involved with the original decision) and a decision would be issued explaining whether the action would proceed, be varied or cancelled. 

Under the existing DRD regime, there is a right to appeal to the County Court against an HMRC decision. The government would like views on whether there should be a similar appeal route here – or another appeal route, for example to the First-tier Tax Tribunal. 

Complaints 

HMRC’s two tier complaints process would be available to those affected by the new process. However, disputes about the validity of the debt or the use of the enforcement process could only be dealt with via objections and appeals. 

A complaint might be appropriate where the taxpayer felt that their case had been handled poorly but would not stop the enforcement process automatically. However, HMRC’s complaints team could intervene if a complaint revealed that something had gone wrong. Once the two-tier process had been completed, customers who remain dissatisfied could refer the matter to the Adjudicator or the Parliamentary Ombudsman (via an MP).

Where complaints are upheld, HMRC would take appropriate steps, which might include:

• Suspending or cancelling deductions if they were applied inappropriately.
• Reimbursing any charges, interest, or costs incurred as a result of HMRC’s error.
• Issuing an apology or goodwill payment where appropriate, in line with HMRC’s redress policy.

Let us know your views

ICAS will be responding to the consultation. We would welcome members' feedback. If you have any comments on any of the questions posed in the consultation, please let us know by 20 July.

Contact us