Can pay, won’t pay? Curtain-up late on Direct Recovery of Debts

Mon 01 Dec 2014

One topic we expected to hear more about at the Autumn Statement was the controversial proposals for HMRC to raid the bank accounts of taxpayers who can pay the tax they owe but refuse to do so, despite numerous requests from HMRC. A storm of protest met the original proposals, known as Direct Recovery of Debts (DRD).  Now HMRC have released a summary of responses that also sets out their revised proposals.  The proposals have not gone away but they have been rethought with a number of important new safeguards that take account of many criticisms made but do not address all the issues and safeguards needed, such as protections for innocent joint account holders.

HMRC’s response document also makes clear that the new proposals will be subjected to an extended period of scrutiny and so will not come into effect until the second Finance Act of 2015 is enacted, during the next parliamentary term. These proposals will not apply to Scotland, as existing debt recovery powers already apply there.

HMRC have also issued an Issue Briefing: Direct Recovery of Debts which provides little more than a potted summary of the content of the consultation response document. What the briefing does do is emphasise that the target is deliberate tax defaulters, individuals and companies estimated to number 17,000 per year, owing on average £5,800.

New and enhanced safeguards

The list of safeguards, both those originally announced in May 2014 and newly added, take up a page (p.18) of the response and include in particular:

·         strengthened internal governance at HMRC so there is oversight over the application of these powers;

·         not taking any money before HMRC have met the taxpayer face to face;

·         special assistance for “vulnerable customers”;

·         starting small, targeting a restricted number of debtors in 2015/16 to gain experience and feedback before full implementation;

·         extending the period for objection to a DRD notice from 14 to 30 days – for example on the grounds that HMRC have made a mistake;

·         working with voluntary organisations and professional bodies to tailor DRD and ensure that advice and assistance are available; and

·         a right of appeal to the County Court.

Draft clauses for inclusion in the second 2015 Finance Act will be published for consultation before the Bill is brought before Parliament. HMRC have then promised there will be a full review of DRD covering its implementation and impact after it has been in place for two years.

Face-to-face visits

Finance (No.2) Act 2015 (which will start life as the Finance (No.3) Bill 2015)will contain provisions requiring “HMRC’s agents” to meet all affected debtors face-to-face to:

·         personally identify the taxpayer and confirm it is their debt;

·         what they owe and why they are being pursued for payment;

·         discuss payment of the debt, including the possibility of a Time to Pay (TTP) arrangement if appropriate; and

·         identify debtors who are in a vulnerable position and offer them the support they need to settle their debts.

Debtors who are not identified as vulnerable and have enough money in the bank but refuse to settle, immediately or under TTP will be considered for DRD.

Vulnerable customers

Both documents refer to HMRC’s intention to provide safeguards for aged and vulnerable persons, something emphasised more heavily in the briefing. HMRC will establish a Vulnerable Customers Unit which will “work closely” with the voluntary sector and whose prime focus will be dealing with DRD cases in the early stages of its operation. The definition of a vulnerable customer is not set out and the unit’s job description suggests that the level of HMRC assistance to the vulnerable, whoever they turn out to be, will gradually reduce, passing the burden onto the voluntary sector.

DRD thresholds

The financial limits on DRD remain as originally announced:

·         DRD will only apply to debts of over £1,000; and

·         no debtor is to be left with less than £5,000 across their bank and building society accounts after DRD.

Joint accounts

HMRC still proposes to have access to the money held in joint accounts (including partnership accounts).  This has caused concern that the funds of one account holder could be used to pay the tax owing by another.  HMRC’s argument for retaining this power is that exempting joint accounts from scope would present an obvious way for debtors to avoid the rules.  What is proposed is that direct recovery of the debt would only apply to a ‘pro-rata proportion of the account’s balance’.  There has to be a concern about how HMRC arrive at such a pro-rata calculation, but all account holders will at least have the right to object or appeal.

Appeals

The Government’s original proposals made no provision for any appeal procedure specific to DRD. The only legal recourse provided was the uncertainty of judicial review which would only have considered whether HMRC had acted correctly in applying its procedures. The  response summary repeats that option but adds that debtors will now also be given the opportunity to contest the validity of their debt before the County Court, including third party rights, or argue that payment of the debt would result in undue hardship.

A drama out of a crisis?

“Can pay, won’t pay” is The Government’s slogan for DRD, targeting wilful payment defaulters. “Can’t Pay, Won’t Pay” is a famous farce of civil disobedience. This production looks set to open in the late summer or autumn of 2015 but much will depend on HMRC getting its Field Force and vulnerable customers units ready in time and the final go ahead may have to wait until the lead actors have been cast in May’s General Election.