In this year’s budget the government proposed a new Direct Recovery of Debts (DRD) scheme. This would allow HMRC direct access to personal and corporate bank accounts – including building society accounts and Individual Savings Accounts (ISAs) – and the power to seize unpaid taxes without having to apply for court approval.
Reasoning behind proposed DRD scheme
HMRC’s analysis shows that some taxpayers and tax credits claimants who owe debts to HMRC have sufficient funds held in accounts to clear their debt. However, they choose not to pay, despite HMRC having attempted to arrange payment on a number of occasions. The current processes for recovering debts from these accounts can be costly, both for HMRC and for the debtor. This policy will modernise HMRC’s methods for recovering debt, bringing the UK in line with other countries that already use similar powers.
The Treasury released this letter:
The Direct Recovery of Debts, announced at Budget 2014, will modernise and strengthen HMRC’s ability to recover tax and tax credit debts from those who are refusing to pay what they owe. It will help to level the playing field between those who pay what they owe, when they owe it, and those who do not. And it will help ensure that compliant businesses do not face unfair competition from others who try to gain an undeserved financial advantage by dodging or delaying their tax payments.
Tax authorities in many advanced economies already use similar powers routinely and responsibly. In these countries, it provides a crucial lever for ensuring the Government is paid what it is owed. Introducing this policy in the UK will bring us in line with many of our peers and form an important part of HMRC’s toolkit.
The Government 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. That is why we are proposing to only use this power against a small core of taxpayers who owe significant debts of over £1,000 and have sufficient funds in their accounts to pay. Furthermore, we are proposing to leave a minimum of £5,000 after the debt has been recovered, ensuring that this does not create unnecessary financial trouble for those affected. We are also proposing additional checks and procedures.
Who would be targeted by DRD
Comparable schemes in the US, Sweden and Australia already exist. HMRC currently intends to target taxpayers owing more than £1,000 and have sufficient funds to pay – leaving a minimum of £5,000 – factored across all their bank, building society and ISA accounts.
The scheme is only expected to recover around £93 million per year – smaller than 0.02% of all tax receipts.
The proposed scheme has been heavily criticised by many business lobby groups, legal practitioners, MPs, and even members of the Treasury Select Committee.
The Federation of Small Businesses (FSB) has warned that inaccurate or outdated HMRC records could lead to small businesses having money deducted from their accounts, reducing their cash-flow and putting them at risk. Businesses are clearly worried about inaccuracy as there are regular instances of HMRC chasing for debt in error.
It is well recognised that HMRC don’t have the best track record of accurately determining which taxpayers owe money and what amounts they owe.
With small firms only just recovering from the increased regulatory burden of Real Time Information (RTI) on their accounts, this proposed scheme is only going to escalate the impact, especially with the introduction of pension auto enrolment.
There is a huge variance in cash-flow between different types of businesses and the limited resources available to HMRC to effectively implement these proposals is also questionable.
HMRC Considerations & Actions
HMRC has said that it would “take into consideration” whether a business account is being used for trading (such as paying employee wages) and “in most cases” prioritise recovering debts from savings rather than trading accounts.
When HMRC identifies a suitable account for DRD, it will:
- Notify the bank or building society to freeze funds up to the value of the debt.
- The account holder will then be notified.
- The account holder will then have 14 days (from the date of notification) to either pay by other means or object.