Pay Up Or Else! How HMRC Deals With Tax Debt

Jennifer Adams examines HMRC’s powers of debt collection including the new ‘direct recovery of debts’ provisions, which are currently going through the parliamentary process before becoming law in Finance (No 2) Act 2015. 

In the ‘good old days’ before self-assessment, if a taxpayer owed the Inland Revenue (as it then was) he or she could go down to the local tax office, discuss a payment plan and hand over a cheque. 

With the closure of those offices, that is no longer possible. Now HMRC have a computer system that enables recognition of late tax payments, triggering an automated process, which could result in liquidation if the tax defaulter is a company, or bankruptcy if an individual. This facility has been available to HMRC for some time, but it is a costly process to make someone bankrupt. Thus new rules (the ‘direct recovery of debts’ (DRD) provisions) are being introduced.

How unpaid tax is collected depends upon the type of tax outstanding. For example, if the underpayment is for PAYE tax, the taxpayer is not self-assessed, and the liability is for £2,999.99 or less, collection will normally be via reduction in the tax code; any figure above that and HMRC will ask for payment direct. If payment is still not forthcoming, a tax return is issued resulting in the taxpayer becoming subject to the self-assessment system and potentially HMRC’s debt management and banking (DMB) department. 

A late payer within the self-assessment system will receive a series of paper reminders and telephone calls from DMB demanding payment, the actual number being dependent upon the size of debt. When HMRC’s ‘digital strategy’ system is fully in place it is intended that email reminders will also be issued. Last year, HMRC made around 16 million contacts with debtors by letter, phone, text message or other means, including face-to-face visits. 

In the telephone call the DMB officer might offer a ‘time to pay’ (TTP) arrangement of agreed monthly payments until the debt is settled. There are currently 650,000 people and businesses making TTP arrangements worth more than £1.6 billion. A TTP arrangement is not a right – it must be negotiated.

Interest will still be charged, but penalties are not if the TTP terms are satisfied. Unfortunately, HMRC’s computer system is not without its problems, and some taxpayers on a TTP arrangement are finding that they are receiving paper demands for the penalties. When the final payment under TTP is made only then are the penalties deleted from the computer system; meanwhile, paper penalty letters will still be issued.

The benefits of a TTP arrangement are certainty over cashflow and suspension of further steps of debt enforcement. HMRC will usually demand regular payments over a period of less than twelve months, will not agree to payment ’holidays’ and will usually not accept a TTP if such an arrangement has been used on a previous occasion.

If the debt remains unpaid or the TTP arrangement is not adhered to, the DMB may issue a ‘notice of enforcement’. This notice gives 14 days to pay and, once issued, it is not possible to go back and agree to a TTP arrangement. The Tribunals, Courts and Enforcement Act 2007, Part 3 allows a charge to be made for the issue of said notice, which increases the debt even further - this charge is currently £75.

HMRC’s right of enforcement is under the Taking Control of Goods Regulations, SI 2013/1894, which enables bailiffs to attend a property to identify, seize and sell goods to settle the outstanding debt. HMRC are taking a more aggressive stance and increasingly using private sector firms to collect debts. In 2013, HMRC spent £14.8 million on external debt collection agencies, an increase from £12.9 million in the previous year, and more than twice the £6 million spent in 2011. 

As in any other debt collection situation, if payment is not made immediately, the bailiffs will look for assets to confiscate and ask the taxpayer to sign a ‘Controlled goods agreement’ whereby if the debt still remains unpaid within a further seven days the bailiffs will return, confiscate the assets and auction them to settle the debt (and charge a fee of £110, plus 7.5% of the amount of the debt over £1,500).

As an alternative to enforcement, HMRC may seek to place corporate entities into administration, or start bankruptcy proceedings against an individual or partners in a partnership (depending on the specific circumstances). However, before bankruptcy proceedings can start a statutory demand must be issued, being a formal request for payment within 21 days. If payment is still not forthcoming, only then can HMRC issue administration/ bankruptcy proceedings. 

The issue of a petition can be made even if an assessment is under appeal and awaiting a tax tribunal hearing, where collection of tax has not been postponed. In Parkwell Investments v Wilson [2014] EWHC 3381 (ChD), HMRC was successful in seeking the liquidation of the company to recover tax debts, despite the fact that the tax in point was still under an appeal at the First-tier Tribunal. This case also showed that insolvency proceedings may be delayed should the taxpayer be able to demonstrate a good case on appeal; however that is for a higher Court to decide, not the tribunal.

In August 2015, HMRC issued an updated ‘Briefing note’ on debt collection, detailing the current procedure: www.gov.uk/government/uploads/system/uploads/attachment_data/file/274675/HMRC_issue_briefing_-_our_approach_to_debt_collection.pdf.

Direct recovery of debt from taxpayer’s bank accounts

It costs money to implement enforcement proceedings. Even though those costs are added to the tax bill, there is still the time cost factor involved. Therefore, in line with many other countries, legislation currently going through Parliament at the time of writing will permit HMRC to recover debts of more than £1,000 directly from a taxpayer’s bank accounts (including building society accounts and cash ISA’s), leaving a minimum of £5,000 in the accounts once the debt has been settled. 

The DRD process permits a 14-day time lapse before monies are withdrawn, thus allowing time for an appeal, but only on grounds of hardship. However, following concerns raised by the Low Income Tax Reform Group, the DRD legislation has been amended to include safeguards, which include a ‘face to face’ visit with the taxpayer. At this visit, the identity of the taxpayer and the amount of debt will be confirmed. The reasons for the debt having been created will be explained, and also the reason why payment is being pursued together with payment options will be discussed, including offering a TTP arrangement where appropriate. ‘Vulnerable’ debtors will be identified and support offered.

After the ‘face to face’ visit, taxpayers who are deemed not vulnerable and have sufficient money in the bank but still refuse to settle their debts can be considered for debt recovery through DRD. Even then, they will have up to 30 days to appeal to a County Court on specified grounds (including hardship), although their bank accounts will be frozen during that period. 

95% of taxpayers pay their taxes on time; of those who do not, HMRC estimates that the new DRD system will be applied to a ‘small number of cases’, approximately 11,000 out of a total number of 50 million taxpayers. The remainder will still be subject to the procedure currently in place.