HMRC Consultation Document - Direct Recovery of Debts Response by the Chartered Institute of Taxation

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1 HMRC Consultation Document - Direct Recovery of Debts Response by the Chartered Institute of Taxation 1 Introduction 1.1 This consultation seeks views on the implementation of the safeguards and other operational aspects of Direct Recovery of Debts (DRD). This is a new administrative measure to give HM Revenue and Customs (HMRC) the power to recover tax and tax credit debts it is owed directly from the bank and building society accounts, including Individual Savings Accounts (ISAs), of debtors without the need to apply to a court. 1.2 HMRC consulted on a similar proposal in 2007 and decided to take no action on the proposal, following strong opposition. 2 Executive summary 2.1 Our response is formed from the extensive experience of our members in dealing with HMRC on a day-to-day basis, but we consider this to be a much more extensive issue than simply a question of tax collection. This is an issue for citizens at large, because it primarily concerns the extra rights a government should be allowed to have compared to individuals and businesses, particularly as it is proposed that such rights will be subject to limited oversight by the courts. 2.2 We do not consider that a valid case has been made to justify giving HMRC the power to take money directly from a citizen s bank account without any court involvement. We do not think that it is a proportionate response to the problem. While HMRC does need to pursue real debts and enforce payment, this approach does not have our support. 2.3 There are obvious concerns about how these proposals might adversely and disproportionately affect vulnerable and elderly taxpayers and it is important that such people are identified early in the process. We ask that HMRC consider excluding these taxpayers from DRD or, alternatively that HMRC commits to taking a

2 common sense approach when dealing with such taxpayers, using DRD as a last resort only. 2.4 We hope that HMRC will make face-to-face contact with the debtor in all cases before applying these new powers. In our opinion it is likely that the effect of these provisions will fall mainly on otherwise compliant taxpayers, whilst the determined non-payers will find ways to sidestep them. The proposed safeguards are not adequate to allay our concerns that errors could be made which lead to hardship and other serious consequences. 3 Is this proposal appropriate? 3.1 The consultation document does not ask whether the proposed new powers are warranted to address the perceived problem, either practically or as a matter of principle. Before we turn to the questions posed by the consultation document, we have therefore addressed the wider question of whether the proposal for Direct Recovery of Debts is appropriate at all. 3.2 HMRC consulted on similar measures in 2007, which were not implemented. We strongly criticised those proposals due to concerns around the accuracy of HMRC records and systems. We still have the same concerns about HMRC records and systems now as we did then. 3.3 HMRC say that these proposals will only apply to those people who are in a position to pay but choose not to, or delay payment for as long as they can, and to those who deliberately avoid engaging with HMRC. Unfortunately, we suspect those who are deliberately withholding payment will circumvent any new rules and the impact will mainly fall on those that are generally compliant, but who are not responding to HMRC s attempts to communicate, for example because they are ill, because they have moved, or because their telephone number has changed. 3.4 The additional costs for HMRC in implementing this change are estimated to be in the region of 800,000 over 5 years. At 17,000 cases per year (say 50,000 over a five year period because of improved compliance) this would suggest an average of only 16 spend per case. This leads us to ask whether this measure has been costed correctly. Perhaps of greater potential concern is that the proposal has been correctly costed, as we doubt if the safeguards can be implemented at such a low cost. 3.5 More broadly, we are concerned whether the potential impact of HMRC error on the proposal has been properly understood. For example, the assessment of impacts states that This measure will have no impact on compliant individuals, This measure will have no impact on compliant HMRC customers and DRD will have no impact on compliant small and micro firms. Clearly HMRC error would have an impact on compliant taxpayers affected by errors. Thus it appears that the potential effect of HMRC error (which we consider in more detail below) has not been addressed at all in the impact assessment. 3.6 Additionally, we do not believe that alternatives to these wide-ranging powers have been adequately explored. We believe that HMRC should be taking all necessary action within its wide range of existing powers to seek to reduce the debt it is owed by deliberate non-payers. Indeed HMRC themselves say that they have made significant progress in recent years in reducing the amount of debt that is owed, P/tech/subsfinal/MoT/2014 2

3 which has been achieved by using existing resources and powers more effectively. We certainly do not agree that a new draconian measure not available to other creditors should be introduced to deal with such a small number of non-compliant taxpayers. HMRC say that less than 0.2% of taxpayers in self-assessment will be affected by this measure. 3.7 It would have been helpful in understanding why HMRC are proposing these measures to know the details of the sorts of debts that HMRC think can be successfully collected through DRD but which cannot currently be collected via a county court judgment. 3.8 The proposals are drafted on the basis that the county court process is an effective measure of enforcement in appropriate cases, but it is a slow and expensive process for others. The document indicates that HMRC only take county court action in a small number of cases per year, and that DRD will provide a remedy that is quicker, lower cost and less invasive. This seems to overlook other issues which are firstly, whether the county court process can be improved, which would be to the benefit of all creditors not just HMRC and secondly, whether HMRC is selecting enough cases to take to court and managing them effectively. We also note that Money Online Claim handles cases up to 100,000 and ask if this is ever used by HMRC. If not would this be a better and quicker alternative to current HMRC practices? 3.9 Subject to our comments about administration below, we cannot see that there is a great deal wrong with the current system: HMRC phones or writes, then sends out field force collectors, and if that doesn t resolve matters it applies for a court order. We would have thought that a fast-track court order process if initial contact does not result in either payment, a Time To Pay arrangement, or the debt being disputed would be a better solution for tax debt than DRD We accept that HMRC does have to incur additional costs in seeking payment from deliberate non-payers and that this is unfortunate. However, we were under the impression that the costs of recovery could be added to any judgment debt, so that the costs are then borne by the recalcitrant not by the ordinary taxpayer. This is not mentioned in the consultation document Additionally, we are concerned that the rules may not achieve their intended result in any event. Firstly, we are concerned that the non-compliant taxpayer would find a mechanism to avoid the effect of the rules fairly straight-forwardly (for example by using non-uk bank accounts). Secondly, the proposals assume that those taxpayers who have not paid their debt to HMRC are either deliberately non-compliant or are vulnerable or on a low income. This ignores the possibility that taxpayers have not paid what HMRC think they owe because they disagree with HMRC s calculation and are disputing the amount. Before using these powers HMRC would have to be certain that the debt they were collecting was correct. How many of the 17,000 deliberate non-payers would consider their debt to be in dispute? We can provide numerous examples of occasions where HMRC has sought to collect disputed debts, or even debts that have already been paid, despite repeated requests from agents to stop the collection process until the matter has been properly resolved. At least if the case gets to court, the court can throw out the claim A number of examples of the use of similar powers are cited in the consultation document but we are struggling to comment on the operation of these in any meaningful way. HMRC mentions that a similar policy is already used by the Department for Work and Pensions (DWP) Child Maintenance Group. We do not have any direct knowledge of this process but we would think that child maintenance P/tech/subsfinal/MoT/2014 3

4 probably does lend itself to such a DRD system as the amounts will have been calculated so as to be affordable out of net income and are spread over a long period. This is not the case with the present proposals, so any comparisons with child maintenance are potentially misleading The document is put forward on the basis that in many other countries the tax authority has this sort of power. On its own this is not a reason to press ahead. It is really impossible to make any further comment on this, as we do not have any direct experience of how systems in other countries operate or whether they operate successfully or otherwise HMRC lost its status as a preferred creditor in 2003 following the implementation of Section 251 Enterprise Act The majority of unsecured creditors, including HMRC, now rank equally as non-preferential ordinary unsecured creditors, in insolvency proceedings. The law already provides bankruptcy procedures to protect both the debtor and other creditors. However, nothing is said in these proposals about safeguards for other creditors, who could end up fighting over 5,000 or less left in the taxpayer s account. This is contrary to the statement made in the Impact Assessment which says that there will be no impact on compliant taxpayers We now turn to the questions posed in the consultation document. 4 Q1: Is 12 months worth of account information sufficient for HMRC to establish how much the debtor needs to pay upcoming regular expenses? months worth of account information will give an idea of past expenditure, but it will not necessarily give any indication of actual commitments, such as loan commitments which may have changed, or circumstances where a partner may have died or lost a job. We believe that HMRC should aim to obtain information of this nature from the taxpayer before proceeding. 5 Q2: Is 5 working days sufficient time for deposit takers to comply with account information requests? 5.1 No comments. 6 Q3: By leaving a minimum balance in a debtor s account, HMRC needs to strike a sensible balance between avoiding putting taxpayers into hardship and collecting money owed to the Government in an efficient manner. Is 5,000 a proportionate and appropriate sum to meet these objectives? 6.1 In many cases 5,000 might be reasonable, but this will depend to a significant extent on a taxpayer s individual circumstances. Again, we would have thought it would be preferable for HMRC to engage with a taxpayer before DRD is considered. It should also be borne in mind that an account balance is simply a snap-shot and may be subject to any number of factors which determine whether it is meaningful as a measure of available cash. P/tech/subsfinal/MoT/2014 4

5 6.2 It is not clear whether overdrafts and credit balances will be offset in determining whether there is an overall balance of 5,000 in the taxpayer s accounts. 6.3 There are also certain accounts that we believe it would not be appropriate for HMRC to take funds from, for example, nominee accounts (eg where an elderly parent may have added a child to help them manage their financial affairs) and trustee accounts (eg where a parent is named as trustee on an infant child s account). There is also the situation to consider where a power of attorney is in place, particularly relevant to an elderly or disabled taxpayer. Do HMRC agree that accounts of this type should be excluded from the rules and if so, how does HMRC propose to identify them? 6.4 We have some particular concerns around employer bank accounts. While we can see that it will be possible for HMRC to match a debt against an employer s bank account we can foresee some practical issues. Firstly, we think HMRC should give an undertaking that they will not use DRD against care and support employers. Secondly, who will HMRC notify of their intentions (Paragraph 3.21)? The payroll person dealing with all the Real Time Information (RTI) returns is unlikely to have knowledge of or access to the business s bank accounts. It would assist if HMRC could commit to ensuring that notice is given to the senior financial/accounting officer ie someone of sufficient authority to ensure that they can take action to investigate whether a PAYE debt is owed and what the consequences are of HMRC taking an amount from their business s bank account(s). 6.5 HMRC say at paragraph 2.26 that their research shows that many of the businesses and individuals who owe HMRC money but refuse to pay have considerable funds available in bank and building society accounts and ISAs. For example, HMRC estimates that, of those who owe the Government more than 1,000 in tax and tax credit debt: 73% have over 10,000 in their bank and building society accounts and ISAs; 48% have over 20,000; and 21% have over 50, We are unclear on the basis for these figures. 7 Q4: What changes will deposit takers need to make to their systems to administer this policy and will this impose any administrative burdens? 7.1 No comments. 8 Q5: Is 14 days an appropriate length of time for the debtor to object to HMRC or pay by other means? 8.1 No, definitely not. We do not think that 14 calendar days is an appropriate length of time. There are frequently delays in HMRC post being delivered; sometimes correspondence can be received more than 14 days after it is dated. A minimum of 28 calendar days would be much more realistic. This would allow for postal delays, holidays, business trips, and illness and so on. P/tech/subsfinal/MoT/2014 5

6 8.2 Additionally, at this point, HMRC will already have asked the deposit taker to place a hold on the account. If DRD has been used inappropriately there is a real risk of damage to the taxpayer s financial position regardless of this safeguard. 8.3 We note that a dedicated telephone line will be available for debtors to contact the DRD team and arrange alternative payment or object that they have been incorrectly targeted. A helpline is a good idea if it is properly resourced, but we suggest that it would be even more useful if it were made available earlier in the process. 9 Q6: What would be a suitable time limit for the deposit taker to comply with an order to release funds, either to the debtor or to HMRC? 9.1 Our only comment would be that we would expect that release of funds back to the account holder should happen as quickly as possible. 10 Q7: What sort of sanction should fall on deposit takers who do not comply either with the initial notice to supply account information or the instruction to release the held amount to HMRC? 10.1 No comments. 11 Q8: Is protecting a proportion of the credit balances of joint accounts the best way to protect non-debtor account holders? 11.1 We completely oppose the suggestion that HMRC should be able to recover money from joint accounts under these proposals, unless the action is against all the joint owners It is unrealistic to make the assumption that balances in joint accounts should be split equally between the holders. Capital can be owned in a joint account in unequal shares. Joint accounts are regularly disproportionately funded and the non-debtor may be contributing 90% of the deposits to the account. There has to be a specific safeguard to protect the non-debtor in such cases There are many reasons for a joint account to be held, so a uniform process to protect the non-defaulting account holder cannot provide adequate safeguards in this area Additionally, the proposal for the joint account holder who does not owe money to HMRC to have to provide personal details of needs is unnecessarily intrusive and burdensome. We would question whether this part of the proposals is in breach of Article 8 of the European Convention on Human Rights (Right to respect for private and family life). It is hard to see how these proposals are [an] interference by a public authority.. [which] is necessary in the interests of.. the economic wellbeing of the country as required by that article. 12 Q9: Are these safeguards appropriate and proportionate? P/tech/subsfinal/MoT/2014 6

7 12.1 No. The proposed safeguards are wholly inadequate We are grateful for HMRC s acknowledgement of the serious consequences of errors for debtors. We would add that the consequences of mistakes could also be serious for HMRC, not least the bad publicity such mistakes would generate. We think that the risk of errors being made is very high indeed. We have already referred to cases where the amount of tax is in dispute or has already been paid. There is also the risk of mistakes being made in the identification of account holders. The experience of our members is that mistakes in the current system are frequent We do not believe that the number of contacts which HMRC indicate take place in cases where DRD is applied will represent a meaningful safeguard. HMRC say that before getting to the stage where DRD is applied, a debtor in self-assessment who has a good history of compliance will typically have been contacted by HMRC around nine times in total (including by letter and telephone). At a minimum, they will have been contacted four times. We are concerned that as part of this contact HMRC are including contact before a debt has even been established, ie a reminder to file a tax return. This seems inappropriate. A debt should be established first before contact is counted for the purposes of DRD If contact between HMRC and taxpayer is to represent a meaningful safeguard, there should be a prescribed timetable of specific contacts required before DRD is applied, rather than a vague assortment of contacts by telephone and post depending upon the taxpayer s compliance history. For anything to count as a contact for these purposes, it should be specific in terms of demanding payment of tax which is owed (and not disputed) with a clear warning that failure to pay could lead to DRD There are also clearly a range of reasons why taxpayers may not be responding to HMRC. For example, it does not matter how many letters are sent if they are being hidden by another tenant or delivered to the wrong address. Similarly phone calls to the wrong number make no contact. HMRC seems to assume that all its letters are delivered to the addressee and all its phone calls are answered by the appropriate person. We do not believe this to be so. We are concerned that telephone calls not answered are treated by HMRC as contact, even if no message is left. We believe that contact is only established if the letter is delivered or the phone call answered by the correct person. It is essential for there to be meaningful personal contact before the process is started. Personal contact would also enable HMRC to assess whether the recipient has sufficient capacity to deal with their tax affairs We have particular concerns about how DRD will affect elderly and vulnerable taxpayers. DRD could have a serious impact on such people and it is important that taxpayers who fall into this category are identified early in the process. We ask that HMRC consider excluding elderly and vulnerable taxpayers from DRD or, alternatively that HMRC make a firm commitment that they will use all available information they have and a common sense approach when dealing with such taxpayers, and that DRD will only be used as a last resort after full engagement has been made with the taxpayer and HMRC are completely satisfied that the taxpayer understands what is happening. We would recommend that HMRC considers how other organisations, such as utility companies, identify vulnerable customers in order to develop a set of guidelines to minimise the risk of impact on the elderly and the vulnerable. P/tech/subsfinal/MoT/2014 7

8 12.7 Critically, there is very limited reference to ensuring that the debt really exists and is not in dispute. Before DRD is activated the quantum of what is owed should have been agreed between HMRC and the debtor. As previously mentioned, our members have plenty of experience of seeing HMRC errors, for example, where an extra digit is added when keying information so 11,500 salary becomes 115,000 or where a debt that has already been paid is revived due to HMRC error We can provide numerous recent examples of individuals being pursued for payment of disputed or incorrect amounts by DMB, and DMB collectors turning up at premises for amounts that are not due In particular, bearing in mind the problems many of our members have faced with the RTI reporting system and the difficulties this has led to with reconciliations and disputed charges it would be totally inappropriate for a PAYE debt to be established until at least HMRC had notified the employer in writing that a debt was owed and the employer had had an opportunity to challenge it The consultation document refers to the debtor usually having the option of appealing to the First Tier Tribunal (FTT) on the amount of tax due or on the legal basis of the liability before DRD is applied. This is not always the case, for example if an HMRC error leads to an incorrect PAYE liability or a determination is made by HMRC as in the case of Mr A cited in the consultation document itself There is also nothing to insist that actual engagement with the taxpayer has taken place. We recognise that HMRC hope that DRD will encourage taxpayers to talk to them, but it is no means certain that taxpayers will voluntarily come forward, which could be for any number of reasons, not just because they have deliberately taken the decision not to engage with HMRC. We think therefore that, before the DRD process even begins, it is crucial that someone from HMRC actually speaks to the taxpayer, ensures they understand the issue, gives them adequate time to speak with others, such as their accountant or payroll clerk and then speak with HMRC again and determine whether the debt is correct or how to deal with it Ideally, we would like to see some form of judicial oversight of the provisions from an independent source, like the FTT, as an additional safeguard at a much earlier stage in the process The proposals for compensating taxpayers as a result of HMRC error are inadequate. There is a reference to the debtor being fully recompensed for any losses incurred as a direct result of an HMRC error (our highlighting). The one example given is that HMRC will ensure that the taxpayer does not lose his tax free ISA limit for the year if funds are mistakenly taken from an ISA account The implication of the use of direct in this context is that a taxpayer would not be able to claim compensation unless a specific direct link to the inappropriate use of DRD could be established. If the proposals are to go ahead, we would hope to see a much clearer commitment to putting right any financial consequences of HMRC s inappropriate use of DRD, whether those were direct or indirect. 13 The Chartered Institute of Taxation 13.1 The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational P/tech/subsfinal/MoT/2014 8

9 charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. The CIOT s 17,000 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. The Chartered Institute of Taxation 28 July 2014 P/tech/subsfinal/MoT/2014 9