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Mark McLaughlin CTA (Fellow) ATT TEP comments on HM Revenue & Customs' proposals in its consultation document on tax debts.

Mark McLaughlin

Radical reforms

HM Revenue & Customs (HMRC) have released proposals for a radical reform of the law and practice in relation to the collection of tax debts. Some of the tax collection statistics in HMRC’s consultation document make interesting reading, and perhaps underline the reason for future reforms:

• £200 billion is paid each year in PAYE income tax and National Insurance contributions;
• As at March 2006, there was an outstanding tax balance of £22 billion;
• HMRC makes more than 400,000 visits per annum to collect tax or take distraint action, and takes more than 200,000 court actions a year for unpaid tax.
• HMRC writes off around 1 per cent of its receipts, mainly due to taxpayer insolvency.

The Government has seemingly prompted a tougher line by HMRC in recent years, in respect of non-compliance by taxpayers. Having recently tackled the issue of penalties for taxpayers who file incorrect tax returns, their attentions have now turned to those who pay their liabilities late.

Five year plan

The proposals are part of a consultation document (‘Payments, Repayments and Debt: The Developing Programme of Work’) issued on 25 June 2007. The proposals “form part of a broader agenda which aims to transform the way HMRC handles payment and manages debt over the next five years.

It should be emphasised that the consultation introduces “a range of ideas” rather than firm proposals. In addition, HMRC consider that “two areas of taxpayer behaviour are central”.  The payment of tax liabilities at the right time is one area. The other area is the timely submission of correct tax returns (i.e. Self Assessment, PAYE, NIC and VAT), and HMRC have already consulted and are making legislative changes in the latter area.    

In addition, whilst some of the proposals amount to an extension of HMRC’s powers, some taxpayers may be unaware that HMRC already have substantial powers in respect of tax debts, such as the legal power to distrain certain goods in England, Wales and Northern Ireland without the need to apply to the courts.

‘Carrot and Stick’ approach

Publicity in the Press has focused on proposals to strengthen the Revenue’s powers. However, those powers are mostly aimed at taxpayers who won’t pay, rather than those who are genuinely unable to pay.

Carrots…

In fact, the Revenue have suggested various ways of helping taxpayers to pay their tax liabilities. These include:

• Payment of tax liabilities by credit card;
• Flexible payment methods (e.g. fixed instalment payments spread over a number of months), on an optional basis;
• Offsetting tax repayments against tax debts (i.e. putting an existing informal practice on a statutory footing);

Of the above ideas, flexible payments will perhaps be most attractive. HMRC have indicated that a business with outstanding debt would not be prevented from taking up any flexible payment options introduced, provided that it was “in contact with HMRC”. 

…and  sticks

HMRC clearly see tax debts as a significant problem, which needs to be tackled. However, the taxpayers who should be most concerned with the proposed changes are those taxpayers who “deliberately choose not to pay”. HMRC’s altruistic approach (i.e. that taxpayers who will not pay have an unfair advantage over those who pay on time) would seem to disguise that the real reason for the changes is to boost the Government’s coffers.

‘Freezing’ accounts and assets 

The proposals for increased powers include direct attachment of taxpayers’ assets. This has been a real ‘headline grabber’ in the press. HMRC’s suggestion is that it should be able to secure a taxpayer’s bank or building society accounts by “freezing” the amount of the tax debt. HMRC would also be able to place a legal charge over land and buildings, but would continue to pursue collection of the unpaid tax while the charge was in place.

This would undoubtedly represent a serious extension of HMRC’s powers. However, HMRC also state that they “…would exercise the same judgement in doing this as it currently uses when deciding whether to seek a third party debt order in England and Wales”. Thus the new powers – if enacted – would probably only affect serious and/or persistent offenders. Taxpayers with temporary cashflow problems who are genuinely unable to pay their tax arrears should be largely unaffected by such measures.

Taking action against taxpayers for the enforcement of tax debts can be a costly and time consuming exercise for HMRC. It is therefore not usually in their best interests to take enforcement action against taxpayers. For those facing temporary financial difficulties, HMRC will consider “Time to Pay” arrangements with taxpayers or their advisers. However, taxpayers who avoid paying their tax on time face a harder time doing so in the future.

Other proposals

Further proposed changes announced include the following:

• Collecting tax debts through PAYE – at present, taxpayers in receipt of employment income have the option for HMRC to collect self-assessment underpayments of up to £2,000 by reducing their PAYE codings for subsequent tax years. HMRC’s proposals extend this ‘coding out’ process to all small tax debts, without the taxpayer’s consent. ‘Small’ would need to be defined in this context, but HMRC cite £500 as an example.
• Tax clearance certificates - HMRC have also suggested the issue of certificates to businesses who comply with their tax obligations. The idea is that businesses with a ‘clean bill of health’ (my terminology) will be able to compete for Government contracts, grants and subsidies, and obtain various licences.

Safeguards

New powers must be managed and controlled by adequate safeguards. These are likely to include taxpayers’ rights of appeal against HMRC’s attachment of tax debts against bank accounts, land or property. This should assist in cases of hardship. In the case of joint (e.g. husband and wife) assets, HMRC and professional bodies are likely to consult on how to protect the ‘innocent’ party or account holder.

Changes were always on the cards in any event, following the merger of the Inland Revenue with HM Customs & Excise on 18 April 2005. HMRC considered that the procedures and powers of the former departments needed to be aligned. For example, under the proposals direct (e.g. income tax) and indirect (e.g. VAT) tax collection would be subject to the same powers, such as in respect of distraint and court action. 

Have your say!

Professional bodies and other interested parties have until 17 September 2007 to send their comments to HMRC on the ideas put forward. The Chartered Institute of Taxation (CIOT) have already expressed concerns over the proposals. An open letter from Rob Ellerby, President of the CIOT, has highlighted potential problem areas in HMRC’s suggestion of open access to taxpayer bank accounts.

The consultation process is an opportunity for taxpayers and advisers to have their say, and possibly to influence the shape of new legislation on the collection and administration of tax debts, which would appear to be inevitable in one form or another.

Mark McLaughlin CTA (Fellow) ATT TEP is a Consultant to TaxDebts (www.taxdebts.co.uk), who assist taxpayers with outstanding tax problems. The above article is reproduced with the kind permission of TaxDebts.