Strong pressure from UK accountancy bodies and business advisors has forced Her Majesty’s Revenue and Customs service (HMRC) to reconsider their approach to new legislation, known as Direct Recovery of Debts (DRD).
In response and acknowledgement of widespread concerns about the potential “unconstitutional” nature of the legislation, the HMRC has announced safeguards that will be put in place to protect vulnerable debtors in the UK, and ensure a transparent appeal process.
What exactly is DRD, and why is there a problem?
Announced in the 2014 Budget, DRD gives the HMRC the power to recover tax debts of £1,000 or more directly from the bank and building society accounts of debtors. With £100 million in additional revenue expected from the controversial measure, DRD was initially put forward as a way to recoup money that would help reduce the UK deficit and fund public services.
However, there has been strong criticism from UK accountancy bodies and business advisors for the legislation arguing it puts vulnerable people at serious financial risk. Immense pressure was placed on the HMRC to reconsider the legislation, resulting in the introduction of further safeguards in an attempt to placate concerned stakeholders.
So what were the initial worries surrounding DRD?
- DRD essentially makes the HMRC a preferential creditor, and could jeopardize a debtor’s ability to make their mortgage or rental payments
- The HMRC could act unreasonably, and that a high risk of error existed within the system
- A loss of public confidence could develop should the process not work
- Appeal procedures were unclear
- DRD was considered fundamentally flawed—seen by many as an infringement of civil liberties
As a result of stakeholder pressure, further consultations were held with UK tax and accountancy bodies, businesses, and individuals with the aim of providing reassurance and introducing further safeguards within the legislation.
Have new safeguards been introduced?
Additional consultations resulted in new measures intended to protect the interests of debtors, and provide reassurance to all. Each debtor targeted will now receive a face-to-face meeting with an HMRC officer in order to establish the facts surrounding their debt, options for payment, and identify potentially vulnerable debtors at this stage of the process.
Financial information accessible by the HMRC has also been limited to the balance of a debtor’s account, rather than 12 months financial information as originally planned. Furthermore, the issue of the HMRC becoming a preferential creditor was dealt with, and a plan put in place to repay to the liquidators any money taken from a bank account before liquidation.
The HMRC has also agreed to scale down the process during the first year in order to gauge its effectiveness and gather feedback. Professional bodies will be consulted on the best way to communicate with the debtors affected by DRD, ensuring that everything is explained clearly, including further sources of help and advice.
Additionally, the HMRC intends to work with the volunteer sector to set up a new unit dedicated to helping vulnerable customers. Further safeguards include a clearer appeal procedure, whereby debtors have 30 days in which to make their appeal, as well as having the right to use the county court system during an extended period of 30 days.
“Having supported compliant taxpayers and provided help to those who find it difficult to comply, it is only fair to promptly pursue those who choose not to pay on time.”—David Gauke, Financial Secretary to the UK Treasury
This quote certainly sounds reasonable, but the underlying worry of those working alongside the HMRC is that the wrong people may be drawn into a system that inflicts further unnecessary financial distress.
Is this a global issue?
To put this UK issue into context, let’s have a look at how tax is collected in other countries, identifying similarities and differences.
United States
The US Internal Revenue Service can place a levy on the funds in a bank account without approaching the courts. This allows them access to the entire balance of an account at that moment, regardless of whether it is a joint account as long as the terms of the account do not require joint signatures.
After a period of 21 days, the IRS can recover the debt. The account holder has various routes of appeal against the levy, including the Collection Appeals Program and Collection Due Process.
Australia
No court orders are needed in Australia, where the system uses “Garnishee Orders” to recoup monies via a third party such as a bank or an employer. Joint bank accounts cannot be targeted in Australia.
“Point-in-time” Garnishee Orders result in the immediate payment of funds, followed by the expiry of the Order. “Standard” Garnishee Orders can also be served, and these stay in place until monies are paid over a period of time, or the Commissioner of the Australian Tax Office revokes the Order.
Other Nations
Stringent rules regarding payment of tax debts exist in other countries too, with garnishee orders in use in Finland and Hungary. Banks in the Slovak Republic are legally obliged to investigate the accounts and financial assets of potential tax debtors.
However, it is worth nothing that there are significant differences between the UK tax system and other nations. As Baker Tilly said in its formal response to the UK consultation document on DRD, “…we believe [the facts quoted in the consultation document] need to be taken in a proper context, acknowledging that there are significant differences in these tax systems when compared with the UK.”
Keith Tully from Real Business Rescue is a leading corporate insolvency specialist in the UK. He has over 25 years’ experience in advising company owners and stakeholders in times of financial uncertainty.