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Tony Wickenden: Direct recovery of debts disclosed

HMRC is deadly serious about getting tax it is owed as soon as possible.

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Highlights from the Autumn Statement for financial planners were undoubtedly the pensions and inheritance tax discretionary trust proposals and draft legislation.

But there were other developments worth noting; developments that, while not grabbing the headlines (even in the trade press), are nevertheless important for planners to know about.

What am I talking about? Well, following a period of consultation which ended on 29 July, it was confirmed in the Autumn Statement that legislation would be introduced to enable tax and tax credit debts due to HM Revenue & Customs to be removed from debtors’ accounts in credit.

Currently, HMRC does not have the power to hold and/or remove debts direct from bank accounts of debtors without first applying to the Courts under Part 72 of the Civil Procedure Rules 1998 for a third party debt order.

Proposals for direct recovery of debts were first announced in Budget 2014 but have been substantially refined following criticism, both publicly and through the consultation process. Under the initial proposals, if a tax debt of more than £1,000 was established and there had been no move from the taxpayer to contact HMRC to arrange payment, appeal or ask for more time, HMRC would have the right to identify a bank account belonging to the taxpayer and freeze an amount to pay the tax.

The taxpayer would have 14 days to contact HMRC and appeal or explain the amount was not due. If there was no contact, the money would be taken directly from the account.

Under the revised system, safeguards to protect vulnerable taxpayers have been strengthened significantly.

Under the new DRD rules, to be introduced during the next Parliament, HMRC will be given specific powers to recover debts direct from bank and building society accounts (including Isas) of debtors.

However, following strenuous representations from the professions and other interested parties, the original proposals (seen as unjustifiably harsh) have been “watered down” considerably. Under new proposals only debtors who are in the so-called “can pay, won’t pay” category will be targeted. Essentially, HMRC will be looking to focus on taxpayers who have been repeatedly contacted but have not responded. Subject to this, every debtor targeted will receive a face-to-face visit from HMRC agents before their debts are considered for recovery through DRD.

In cases where debtors have received this visit, have not been identified as vulnerable, have sufficient money in their bank account and have still not arranged to settle their debts, HMRC may require banks, building societies and other deposit takers to place a hold of up to 30 days on the amount of the debt due to HMRC. Removal of funds from accounts will be limited to credit balances and safeguards will be put in place to ensure a minimum credit balance of at least £5,000 remains in the account after the debt has been held. There will be rights of appeal to the County Court against the exercise of this power on specified grounds, including hardship and third party rights. 

There will also be provisions to protect the rights of joint account holders broadly providing that DRD will only be applied to a pro rata proportion of the account’s balance, all account holders will be notified that action has been taken and all account holders have equal rights to object or appeal. 

HMRC estimates DRD will apply to around 17,000 cases a year and will only take action against debtors who owe over £1,000 of tax or tax credits debt.

Secondary legislation to introduce the direct recovery process and safeguards will be published in the spring.

The DRD rules represent further evidence of HMRC’s commitment to improving “tax cash flow”.

The issuing of accelerated payment notices to those who have adopted tax avoidance schemes which have Dotas numbers and for which there is an open enquiry has already received significant publicity. Strengthening the Dotas provisions is an important part of making the APN initiative work. These provisions are broadly part of the same initiative as DRD: getting tax in earlier than it is currently and having the tax in dispute residing in the HMRC coffers rather than the taxpayer’s.

Taken together, strengthened Dotas, APNs and DRDs (get used to the acronyms) tell us HMRC is deadly serious about getting in what it believes is owed to it as soon as is possible.

Tony Wickenden in joint managing director at Technical Connection 

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