In the Budget earlier this year, George Osborne announced plans to allow HM Revenue & Customs (HMRC) to recover tax debts directly from the bank and building society accounts of people and businesses owing money.
A consultation called the Direct Recovery of Debts (DRD) subsequently followed between May and July and HMRC is currently considering the feedback received. A further update is expected with the Autumn Statement on 3 December before tax legislation is introduced next year.
Current projections from HMRC suggest that DRD will apply to around to 17,000 cases a year, with the debtors affected by the new policy having an average tax debt of £5,800.
What is a tax debt?
According to HMRC, around 90% of taxpayers in self-assessment file and pay on time, but 10% file late or do not file at all, which can create a tax debt.
Examples of tax debts include:
- Unpaid taxes, including tax, VAT and PAYE, as well as outstanding National Insurance Contributions
- Interest and penalties owed on the unpaid taxes
- Overpaid tax credits which have not been paid back
HMRC is particularly keen to pursue people who are in a position to pay their tax debt but choose not to and those who delay payment for as long as they can.
Of those who owe more than £1,000 in tax debt, HMRC estimates:
- 73% have over £10,000 in their bank and building society accounts and ISAs
- 48% have over £20,000; and
- 21% have over £50,000.
DRD will be applied where there are ‘established’ debts of at least £1,000 in total. This figure could be comprised of a single debt or a multitude of smaller tax debts.
A debt becomes ‘established’ as soon as a person or business does not pay, or contact HMRC to arrange payment of what is owed, by the due date and fails to respond to payment prompts. HMRC will typically contact a debtor between four and nine times in total, via letter and telephone, in order to seek payment of the debt.
Rarely has a tax proposal been received with such hostility.
Whilst HMRC is adamant DRD is required to help level the playing field between those who pay what they owe, when they owe it and those who do not, there has been a chorus of disapproval based around issues such as HMRC’s reputation for getting things wrong and the perceived invasion of privacy into people’s lives.
Even MPs have raised their concerns about the lack of safeguards, independent oversight and asked if HMRC is granted this power what will stop local authorities, for example, asking for the same in order to chase council tax debt?
Overall, the best solution remains communication. If paying a tax debt is going to or has become a problem, talk to HMRC about time to pay. As at February 2014, £2.4billion of tax debt was being collected via Time to Pay arrangements.
Author: Guy Smith, Tax Investigations Manager on the ReSource Tax and VAT Consultancy Team
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