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Kelly Hayworth of the Low Incomes Tax Reform Group comments on a recent report by the National Audit Office on the management of tax debt.  

Introduction

LITRG generally welcomes today’s National Audit Office report on HMRC’s management of tax debt. 

Recommendations are offered which, if properly implemented, could improve tax debt collection processes for those on low incomes. 

The National Audit Office has today reported its findings from a Value for Money study into HMRC’s management of tax debt.  This is the first report of its kind since the merger of the former Inland Revenue and HM Customs & Excise to form the combined Department.

It is gratifying to see that specific LITRG recommendations have been supported.

Whilst the report only looks at how HMRC handles tax debt (i.e., excluding tax credits and child benefit overpayments), for many low-income families tax debt and tax credits debt may co-exist.  We therefore stress that HMRC should consider the related tax credits issues when taking forward the report’s recommendations.

It is concerning to note that the report cites lack of resources in many instances where HMRC have failed to make progress.  Again this calls into question the Government’s programme of ‘efficiency savings’ through reduced staffing levels. This is a particular concern when it comes to the time that must be invested in the most vulnerable. 

NAO’s recommendations

Acknowledging there is room for improvement in HMRC’s processes, the report recommends that HMRC should:

Short term / lower cost

1. measure ‘time taken to collect debt’;
2. measure the cost-effectiveness of different collection methods;
3. provide more information – both on the website and in print – on tax payment issues;

Longer term / greater cost

1. use information on customer behaviour, from both internal and external sources, to tailor debt collection action;
2. introduce a system linking debts so that taxpayers’ affairs are viewed and dealt with holistically;
3. introduce new communications technology to manage workload;
4. consider expanding evening and weekend debt collection work;
5. explore further changes in powers to recover tax debts direct from salaries or bank accounts without a court order, or make use of private debt collection agencies;
6. introduce new communication methods such as email and text;
7. explore other payment options, such as automated payment by telephone.

We expand below on how these recommendations could be implemented so as to provide help for low-income families. 

Changes we now hope to see from HMRC

Getting into tax debt can be a worrying time for many families – particularly at a time where other economic factors mean many are finding it hard to make ends meet.  We see many instances where the debt has arisen through no fault of the taxpayer, but HMRC’s handling of the situation differs little, if at all, to their actions in pursuing the wilfully delinquent. 

The recommendations in the NAO’s report therefore need now to translate into positive action from HMRC.  We outline below some suggestions.

• Unexpected debts must be prevented from arising in the first place – for example by HMRC improving their systems to ensure that they use information in their possession to adjust PAYE codes promptly and accurately.
• Better taxpayer education in ways that are relevant to the taxpayer. Dumping material on a website does not equal communication.
• Contact – at least initially – with taxpayers should be shifted to a more co-operative rather than threatening approach.  Automated and standard processes must be departed from where they are unsuitable for use in individual cases.
• HMRC’s staff need to be trained to deal sympathetically with customers in debt, taking into account special needs or individual circumstances, and regular monitoring must ensure that standards are maintained.
• A pragmatic approach must be taken where, for example, it is clear that pursuing a benefits claimant to an expensive court case will result in considerable strain on the claimant for negligible yield.
• The report suggests ‘a more effective penalties regime could help prevent debt arising’.  In pursuing further changes to penalties legislation, HMRC must appreciate that ‘more effective’ does not necessarily equate to ‘stronger’ as harsh penalties are ineffective in cases where the debtor simply does not have the means to pay.  Penalties should be capable of suspension so that they can be used in a more positive light as an incentive against future non-compliance.
• HMRC should always make equal efforts to contact all taxpayers at an early stage and discuss payment options with them, for example agreeing a 'time to pay' arrangement.  It is unfair if small debts are allowed to become large debts so that the debtors have no hope of repaying; it is also inefficient.
• Further changes in HMRC’s collection powers should not be pursued without HMRC first improving their systems.  It is impossible to take a holistic view of a customer’s affairs and therefore effectively manage their overall debt without first having the infrastructure to cope.
• Working together with other government departments and improved data-matching could also help HMRC to prevent debt arising.

Conclusion

We welcome the acknowledgement in the report that more needs to be done to help vulnerable people who find themselves in debt to HMRC – for example using risk profiling methods to identify those who ‘can’t pay’ as against those who ‘won’t pay’.

However, we are fearful that HMRC might take the view that harsher and more vigorous pursuit of debt, in accordance with the recommendations, should take priority over the more time-consuming, but equally necessary, protection of the most vulnerable.