HMRC is focusing on using its new powers to increase tax debt collection from a wide range of taxpayers. It can now demand security for potential future debts (with a criminal offence if businesses fail to pay) and will soon gain the power to take cash from debtors’ bank accounts. This new push extends to trawling through old records looking for missing payments and tougher court action. The High Court recently allowed a company to go into administration because of tax debts despite a pending appeal before the tribunal disputing the tax due.
HMRC has an impressive and growing range of powers to collect the cash owed to it by taxpayers. This is a crucial aspect of the government’s efforts to reduce the deficit. Taxpayers who do not pay what is owed on time are likely to experience one or more of the collection methods set out below.
HMRC’s systems allow it to automatically recognise when tax payments have not been made on time. This triggers many automated processes, but the key point is that the debt is flagged up to HMRC’s Debt Management and Banking (DMB) department.
Where the debtor’s contact details are unclear or unknown, HMRC can issue a notice to a third party (FA 2009 Sch 49) to obtain the debtor’s contact information. Where debtors cannot be traced, in some circumstances responsibility for PAYE and NIC debts may be transferred to other parties, for example where there is a deliberate failure to pay in cases involving a managed service company (MSC), an employment intermediary or even an employee. For cases involving MSCs, ITEPA 2003 s 688A(2) allows the debt to be transferred to:
The collection process starts with the issue of payment reminders to the taxpayer. Following a series of reminders (the number depends broadly on the size of the debt), a DMB officer will telephone the taxpayer to demand payment. It is not uncommon for a ‘time to pay’ (TTP) arrangement to come into play at this stage (see below).
If the debt still remains unpaid, HMRC may issue a notice of enforcement. Should the notice not result in payment in full, HMRC may begin enforcement action under the Taking Control of Goods Regulations, SI 2013/1894. This replaced the old law of distraint (for England and Wales) on 6 April 2014 and enables HMRC to send in its ‘field force’ (otherwise known as bailiffs) to identify, seize and sell goods to settle outstanding debts. HMRC increasingly uses third party bailiffs and enforcement agencies to facilitate the collection of the debt.
Alternatively, HMRC may seek to put corporate entities into administration or start bankruptcy proceedings against an individual or partners in a partnership (depending on the specific circumstances).
Historically, HMRC had separate teams dealing with direct and indirect taxes on insolvency. In November 2014, HMRC announced, in Revenue & Customs Brief 42/2014, that it is combining those teams so that there will be one process dealing with all tax debts.
Occasionally, the debt slips through the reminder process. However, according to Limitation Act 1980 s 37, there is no time limit befor which HMRC must pursue a debt for tax or interest once the assessment or demand has been issued (although s 9 and s 24 of the Act do apply six year time limits for NICs and related penalties). DMB teams work through lists of old debts, issuing letters to taxpayers with a statement setting out all liabilities which HMRC believes are overdue for payment.
Security can be demanded for debts of PAYE, NIC, VAT, insurance premium tax, aggregates levy, climate change levy and landfill tax. HMRC uses this power to limit its exposure to potential bad debts when it is concerned that a business may fail to pay its debts in future. HMRC will issue a notice of requirement to give security to companies and their directors, or to LLPs and their partners, if:
The notice requires that security is given within 30 days. The company and its directors are jointly and severally liable to give the full amount of security. The security can only be provided by:
In addition, the taxpayer may be entered into the Managing Serious Defaulters regime. The security is normally held for 24 months but, if the company or LLP meets its normal tax obligations (including payments), the holding period may be reduced. When it is no longer required, the security is either repaid or set against outstanding tax debts.
If the taxpayer disagrees with anything in the notice, then they must appeal to HMRC within 30 days of the date of the notice, setting out what they disagree with and why. HMRC will then contact them to discuss it. If no agreement is reached, the matter may be referred for internal review or a hearing before the First-tier Tribunal.
Failure to give security is a criminal offence and HMRC may prosecute the company and directors, or the LLP and partners: convicted parties will be fined up to £5,000. If the company cannot fund the security, it can seek a TTP agreement before the deadline for paying the security. If it is refused, it has a further 30 days after HMRC notifies its decision to pay the security to HMRC.
Further information about the requirement to give security can be found in HMRC’s Security Guidance Manual and in its series of factsheets (SS/FS1, SS/FS2a, SS/FS2b and SS/FS3–SS/FS6).
Since 2008, HMRC has allowed companies and individuals to defer paying taxes and duties through TTP arrangements. While interest is still charged on late payments, the benefits to taxpayers are:
It is best to request a TTP arrangement before payments fall due and it is helpful to show that the business (or individual) has taken steps or put plans in place to cut costs. In addition, all taxes on which there are arrears should be covered by a TTP arrangement. HMRC should be the last option, not the first; the taxpayer should have approached other sources of finance, e.g. banks for loan finance, before approaching HMRC. HMRC may expect them to demonstrate this as well as providing information such as cash flow projections.
HMRC is unlikely to agree to instalments over more than 12 months, or to payment holidays; regular monthly payments, even if small to start with, are preferable.
The instalment agreement must be realistic, because failure to make TTP payments may lead to enforcement action or to liquidation or bankruptcy applications. In recent months, HMRC has become increasingly reluctant to agree a TTP arrangement where a taxpayer has had one previously.
Where the ‘debt’ arises from tax in dispute because of a tax avoidance scheme, under FA 2014 ss 219–229, HMRC may issue an accelerated payment notice (APN) to a taxpayer if:
Tax avoidance arrangements are caught if:
The notice effectively prevents postponement of tax while an enquiry or appeal is ongoing. The payment must be made within 90 days of the APN or 30 days after HMRC issues a determination in response to any representations made following the notice’s issue.
However, a TTP arrangement may be agreed with HMRC’s DMB team before the payment deadline. If the taxpayer instead decides to withdraw from participating in the scheme and chooses to settle the outstanding tax, it may be possible to do this by way of a contract settlement following discussions with the HMRC officer.
In suitable cases, HMRC may be prepared to include in the contract settlement instalment payments which may be made over a period in excess of 12 months. A better result may be achieved in terms of time to pay than via a TTP agreement negotiated with DMB. However, having finalised their tax position, the taxpayer will not benefit if the scheme is ultimately found to achieve its original aims.
DMB teams are able to issue a notice of enforcement to taxpayers who are habitual defaulters (such as those who fail to pay PAYE and NIC for three months). The notice gives just 14 days to pay and, once issued, it is not possible to agree a TTP arrangement. Issuing the notice effectively blocks taxpayers from removing or selling their goods until the tax is paid. New rules under Part 3 of the Tribunals, Courts and Enforcement Act 2007 now allow a charge for this ‘service’. HMRC currently charges £75 just to issue a notice of enforcement!
Failure to pay within the 14 days will lead to HMRC commencing a taking control of goods enforcement action. Such visits from HMRC’s field force will result in an additional charge to the taxpayer of £235 (plus 7.5% of the amount of the debt over £1,500), even if the taxpayer pays immediately.
If the taxpayer cannot pay immediately, the bailiffs take a note of the assets that they wish to confiscate and ask the taxpayer to sign this ‘controlled goods agreement’. If the tax is not paid within a further five 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).
Clearly, the presence of bailiffs at business premises can be disruptive, even if they are not seizing goods, and may cause reputational damage, regardless of whether the visit is a mistake or the debt is paid.
It is advisable to engage with DMB in an attempt to avoid such action. The taxpayer should also proactively consider placing the company into administration, or entering into an individual voluntary arrangement, in order to manage cash flow issues without the confiscation of property.
As a creditor, HMRC can petition the court to put a company into liquidation or to make an individual bankrupt to settle tax debts. This is permitted even where an assessment is under appeal and awaiting a tax tribunal hearing, where collection of tax is not postponed.
In the recent case of 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 FTT.
The High Court ruled that it was obliged to consider the likelihood of the success of the appeal. In this case, the company could not prove its appeal had merit, as it failed to produce evidence to substantiate the entries on its VAT returns. With its appeal doomed and not having sufficient assets to pay the VAT debt, the High Court approved the company’s liquidation. A similar conclusion was also reached by the Court of Appeal in Changtel Solutions UK Ltd (formerly Enta Technologies Ltd) v HMRC [2015] EWCA Civ 29.
When making an appeal, a request should be made to postpone collection of the tax due under TMA 1970 s 55. However, it should be noted that if the case is lost by the taxpayer, the tax may be payable despite an appeal to a higher court (TMA 1970 s 56).
Controversial new rules in Finance Bill 2015 will allow HMRC to recover debts of more than £1,000 directly from a taxpayer’s bank accounts from 6 April 2016 onwards in England, Wales and Northern Ireland. Note that in Scotland, HMRC can already apply for a warrant to enforce debts with Sherriff Officers enforcing it, through arrestment on bank accounts where necessary.
Fortunately, there will be a number of safeguards before direct recovery can take place. The first is that HMRC must have a face to face visit with the taxpayer to:
After this face to face visit, taxpayers who are not vulnerable and have sufficient money in the bank but still refuse to settle their debts can be considered for debt recovery. Even then they will have up to 30 days to object, although their bank accounts will be frozen during that period. Taxpayers will be able to appeal against HMRC’s decision to a County Court on specified grounds (including hardship).
Finally, HMRC must always leave a minimum of £5,000 in the debtor’s accounts once the debt has been collected.
HMRC is clearly sharpening up its debt collection activity. Businesses and their advisers should be vigilant and proactive in order to manage risks and minimise unnecessary costs and disruption.
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