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Mark McLaughlin highlights HMRC’s current debt collection policy and a helpful method of discharging relatively small tax debts.

Introduction

The tax world never stands still. It is hard enough for tax professionals to keep up-to-date with new developments, but for taxpayers it must seem virtually impossible at times.

To make matters worse, HM Revenue & Customs (HMRC) seems to be in a constant state of change, in respect of its systems, organisation and policies. For example, in terms of tax debt recovery, in late 2009 HMRC began moving away from prioritising the recovery of outstanding tax debts according to the amount outstanding. Since then, HMRC has used various strategies to collect tax; their approach generally depends on whether taxpayers are considered to fall within the ‘can’t pay’ or ‘won’t pay’ category.

Tax Debts and PAYE Codes

Legislation was introduced in 2009 to enable HMRC to collect tax debts through PAYE, where the taxpayer is an employee or is in receipt of a UK based pension (ITEPA 2003 s 684(2A), (3A)).

The maximum amount that HMRC can collect through a taxpayer’s PAYE notice of coding was initially set at £2,000. However, this upper limit was increased to £3,000 from 20 July 2011.   

Tax collection through PAYE under these provisions is at HMRC’s option. If HMRC decides to recover tax in this way, taxpayers will receive letters telling them that HMRC intends trying to collect the tax through coding restrictions from 6 April in the following tax year. PAYE notices of coding will then normally be sent to taxpayers between January and March immediately before the start of the new tax year on 6 April, stating that their PAYE tax codes include the collection of the outstanding tax debts. 

HMRC intends using this method of recovery to deal with Self Assessment debts and Tax Credit overpayments to begin with, but it may be extended to collect other types of debt in the future.

HMRC will no doubt find this method of tax collection very useful. Not only will it probably be more cost-effective for HMRC to collect the tax by PAYE coding restrictions than through other forms of tax debt recovery, but it also allows HMRC to use its (apparently scarce) resources more efficiently, e.g. by allowing HMRC Debt Management and Banking staff to focus on more difficult tax debt cases.

Is “Coding Out” a Tax Debt a Good Thing?

Some employees and pensioners might feel aggrieved that HMRC is collecting outstanding tax liabilities by restricting their PAYE notices of coding without the taxpayer’s consent. Is this form of tax debt recovery a good thing or a bad thing for them? The answer is probably “both”.

Taxpayers may think it is a bad thing (understandably, perhaps) when their income starts falling due to their PAYE tax codes and income being reduced (although there are certain limits to prevent excessive PAYE deductions from salary, which extend to HMRC’s ability to code out tax debts).

On the other hand, paying off a tax bill in this way means that payment of the debt may well be spread over a number of months. This is probably a longer payment period than most taxpayers would be allowed if they rang HMRC to ask for time to pay a tax debt by instalments. In addition, there are various other, more unpleasant, ways in which HMRC could attempt to recover outstanding tax debts, such as by using private debt collection agencies, or taking legal action to recover the debt and costs. Recovering tax debts through PAYE codes will therefore be seen by many taxpayers as the lesser of two evils, on the basis that it is better than alternative forms of HMRC tax debt collection.

However, taxpayers who are still unhappy about having their tax debts collected in this way (e.g., because having the debt coded out over 12 months would cause them financial difficulties) can contact HMRC to discuss payment by an alternative method.

Mark McLaughlin CTA (Fellow) ATT TEP is a consultant to Tax Debts Limited, a debt management service for UK taxpayers.