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Mark McLaughlin CTA (Fellow) ATT TEP reports on the second consultation concerning HM Revenue & Customs' tax payment failities and tax debt management.

Mark McLaughlin

'Missing' measures

A second round of consultation on modernising HMRC’s payment services and debt management ends on 6 March 2008. This follows on from the original consultation document, ‘Payments, Repayments and Debt: The Developing Programme of Work’, which was published on 25 June 2007. 

The original consultation document included nine proposed measures. The most publicised and controversial of them was undoubtedly the direct attachment of tax debts to taxpayers’ assets. HMRC’s initial suggestion was that it should be able to secure a taxpayer’s bank or building society accounts by ‘freezing’ the amount of the tax debt. It was also proposed that HMRC would be able to place a legal charge over land and buildings. However, following strong representations by professional bodies and interested parties, HMRC are reconsidering the proposals before any further consultation. Responses to the initial consultation commented that only tax debts agreed as final should be subject to the proposed powers, and that the taxpayer should be warned in advance of HMRC’s proposal to take such action. It was also suggested that the taxpayer should be allowed to demonstrate that freezing an asset would cause hardship, and that the taxpayer should have a right of appeal to the court. Perhaps unsurprisingly, the extension of HMRC’s distraint powers to include the direct attachment of assets does not appear in the latest consultation document.

Unfortunately, among the other original proposals not discussed in the present round of consultations, is voluntary flexible payment schemes (e.g. fixed instalment payments spread over a number of months) to help businesses with cashflow problems. It is to be hoped that this proposal will resurface and be enacted, possibly in enhanced form. The other proposals were the issue of tax clearance certificates, the power to allow HMRC to trace missing taxpayers through third parties and the award of costs in debt litigation where HMRC obtains judgement for unpaid debt.

HMRC have ‘developed’ four of the original proposals, and issued draft legislation for consultation. Those proposals are summarised below.

1. Enforcement powers

HMRC wish to align their four different powers to enforce payment of tax debts outside the court through distraint and distress, which were inherited from the former Inland Revenue and HM Customs and Excise. The draft legislation provides for a single power, (in England and Wales; HMRC are still in consultation regarding Northern Ireland), covering all (direct and indirect) tax debts that HMRC administer. In addition, the proposed legislation would allow HMRC to take a single action for “all but the most serious actions” when pursuing debt through the civil court covering all tax debts owed to HMRC by the taxpayer, thus reducing the potential for more than one action. Similar proposed powers will enable a single application to be made to the sheriff in Scotland for any HMRC debts.

2. Offset of tax repayments

The original proposal to allow the offset of repayments against the whole range of established debts (i.e. tax, duty, interest, surcharge or penalty) administered by HMRC was generally well received. However, the draft legislation (which does not apply to Scotland, where similar provisions already apply) only allows HMRC discretion over this facility, and does not require the taxpayer’s consent. It will be of potential concern to those in receipt of tax credits that HMRC may use tax repayments to reduce tax credit overpayments. Interestingly, the consultation document reports that “…written responses supported the principle that tax repayments might help ease the recovery of tax debt overpayments.” However, under current proposals, taxpayers are unable to prevent HMRC from collecting tax credit overpayments in this way.

3. Credit card payment

Draft legislation allows for HMRC to accept the option to pay by credit card across all taxes and duties for which HMRC is responsible. It does so by allowing for regulations to be made to enable HMRC to pass on transaction fees by requiring a specified fee to be paid in addition to the tax. This follows strong support to the initial consultation. It is also proposed that taxpayers will be informed in advance of the amount that taxpayers will be charged for using credit cards, to allow for the option of an alternative means of payment.

4. Collecting small debts through PAYE

At present, the taxpayer can ask HMRC to ‘code out’ self-assessment income tax underpayments of up to £2,000 against future PAYE notices of coding. The proposal for HMRC to be allowed discretion to recover other small tax debts (subject to possible claims of hardship, or the right of appeal by the taxpayer) is subject to further consultation. However, the definition of ‘small’ in this context is still to be agreed, and no draft legislation has been released at this stage. It is expected that any changes will be phased in over a period of years.

The consultation document (‘Payments, Repayments and Debt: Responses to Consultation and Proposals’), draft legislation and an impact assessment are available (in pdf format) via the HMRC website (www.hmrc.gov.uk) and as mentioned, comments are invited no later than Thursday 6 March 2008.