Adviser Q&A: Direct recovery of tax debts

What is being proposed?

A consultation paper – responses, please, by 29 July 2014 – proposes the creation of a new weapon in HMRC’s tax collection armoury. Should the proposal be adopted, life will become rather difficult for those who habitually don’t pay their taxes in full and on time. In addition to the existing distraining orders – and court supervised relief (such as freezing orders) – HMRC will have  power, without independent supervision, to dip directly into bank accounts to collect tax.

What’s the size of the problem?

According to HMRC’s consultation paper on the issue, something in the region of a remarkable £50bn per annum goes unpaid and has to be collected by HMRC as a debt. However, this figure may well include, for instance, tax due from those who avail themselves of the de facto 28 day (i.e. the period before a surcharge is applied) low interest overdraft facility offered by HMRC. A better way of looking at the scale of the problem might be to focus on HMRC’s annual Measuring the tax gap report, which identifies some £4.4bn as being lost each year through non-payment. This is still a very significant number on any view.

The impact assessment for the proposed measures shows a yield in each of the first four years of +£65m, +£120m, +£100m and +£90m – so something approaching £95m p.a. on average. And the costs attached to this measure – for government at least, because on any view it will impose significant and uncosted compliance costs on banks – are a mere £800,000 over five years. So in terms of net yield for HM Treasury, it’s about as efficient a piece of policy making as you are ever likely to see.

What are the safeguards?

Even the consultation paper recognises that: ‘there are concerns about the impact of this change on vulnerable members of society. We must ensure that there are strong safeguards in place so that this is only targeted at the truly non-compliant.’

As presently envisaged, these will apply at, in broad terms, two stages: before money is taken from a bank account; and afterwards.

The main ‘before’ safeguards are these:

• A taxpayer will have been contacted a minimum of four times about his tax debt (HMRC says nine times on average).
• The measures will only be available where in excess of £1,000 of tax is due and unpaid (for scale, HMRC says it expects the measures to affect 17,000 taxpayers in an average year).
• The measures will never be utilised in such a way as to leave a taxpayer with less than £5,000 in his bank accounts and regard will also be had to his regular pattern of expenditure over the previous 12-month period in considering whether taking the money would cause hardship.

The ‘after’ safeguards are these:

• For a period of 14 calendar days from the date of application of the measures, HMRC will not actually be given access to the monies. Instead, during that period, the monies will, in effect, be blocked and the taxpayer (or the other joint account holder) will be able to make representations to the effect that either a transfer of the money to HMRC would cause hardship or that the tax debt is not due.
• If those representations are not accepted, the monies will be transferred to HMRC.
• If the taxpayer still contends that the monies ought not to have been transferred (his representations having been rejected by HMRC), he can:
  • judicially review HMRC’s actions;
  • appeal to the independent adjudicator; and
  • with the support of his MP, pursue a further right of ‘appeal’ against the decision of the adjudicator to the parliamentary ombudsman.

Obviously, individuals will need to form a view about the efficacy of these safeguards. As I see it, judicial review is difficult to access, expensive, wasteful of expensive High Court judicial resource and, for those reasons, not the right safeguard. Moreover, perhaps because I am a lawyer, I feel much more comfortable with judicial rather than non-judicial safeguards. Proceeding from that perspective, giving resort only to the adjudicator and parliamentary ombudsman is not ideal.

In my view, the proposals might be improved by further thought being given to a more appropriate judicial ‘after’ safeguard, such as that which exists in the case where the taxpayer’s hardship application is refused, for example. In other words, the taxpayer might have a (query expedited) right to appeal to the tax chamber against HMRC’s decision to continue to apply direct recovery measures.

Final thoughts?

Anyone who seriously thinks a policy like this will be implemented without operational failures is someone who’s never seen a policy like this implemented. But if one focuses on eggshells, one never makes omelettes.

The real question, it seems to me, is whether the fact that there are bound to be instances of tax wrongly being taken from taxpayer’s accounts is reason enough not to pursue the policy. In my view, given the size of the problem, the anticipated yield and the fiscal efficiency of the solution, the answer is plainly no.

The consultation, Direct recovery of debts, will close on 29 July. Responses can be emailed to HMRC. The intention is to publish a response document to the consultation in Autumn 2014, followed by the publication of draft legislation for consultation at Autumn Statement 2014, with provisions to be included in the 2015 Finance Bill.