Give them an inch!

The first is a change to HMRC’s ability to retrieve taxes by ‘coding out’, which has barely been mentioned but may have a more immediate impact. Since 2011 HMRC has had the power to recover up to £3,000 of tax debts by adjusting (or coding out) the taxpayer’s PAYE code over the course of the tax year. Secondary legislation has recently increased that limit to £17,000, dependent on means-testing. Taxpayers who earn less than £30,000 per annum will retain the £3,000 limit, incrementally increasing up to the £17,000 limit for those on over £90,000 per annum. Notices will be sent out shortly for the next tax year.

There has been far less opposition to this change, despite it presumably carrying the same constitutional issues as DRD (indeed HMRC will use this step before resorting to DRD). This is perhaps because it is more obviously means tested than DRD, and because the debt would be recovered over 12 months, leaving more time to object.    

Direct recovery of debts (DRD)

The second is the infamous proposal to directly recover debts from taxpayers’ bank accounts. HMRC will have the power to target individuals and companies, regarding essentially the full range of tax liabilities. Various safeguards have been suggested, such as the size of the debt which must be at least £1,000. HMRC must leave sufficient funds in the accounts to cover “necessary domestic day-to-day expenses,” (defined by analysing 12 months of statements) with an absolute minimum of £5,000. The taxpayer will be notified in writing at every step of the process. The funds will be frozen for 14 days before removal, and a new public helpline will be established for affected taxpayers.

DRD was first mooted in the 2014 Budget and comments on the consultation have now closed with a response due shortly. Concrete plans will be set out in the autumn statement, though people now expect the Finance Act 2015 to be truncated due to the election.

DRD has been fiercely attacked on theoretical and practical grounds. Nearly 3,000 people have now signed a petition opposing the new power and a wide range of professional organisations continue to lobby hard against it. They argue, for example, that DRD is unconstitutional and violates the principle of the separation of powers. HMRC will not need a court order to access a bank account, unlike other creditors. There is no right of appeal from DRD, save for the expensive route of judicial review. There could be complications over bank accounts which multiple owners have an interest in, and there is also the argument that HMRC is too under resourced and too accident-prone to be allowed such strong powers.     

However, DRD may pass into law whichever party wins in May. It was passed by the Treasury Select Committee with very little trouble, and only 37 parliamentarians signed an early day motion opposing it.  Given the hostile atmosphere outside the halls of parliament, it is also interesting that some professionals openly support DRD, for example the Institute of Directors (IoD), who argue that the criticism is overblown. HMRC already does not need a court order to confiscate goods, and many other countries, including Canada and Sweden, use some form of DRD.

I personally feel some sympathy with the IoD’s view. HMRC will have contacted the taxpayer numerous times before DRD is reached. A helpline is surely less intimidating to a vulnerable taxpayer than being taken to court. However it is true that at times, the tax authorities can be unresponsive and heavy-handed. For example, HMRC recently sent 2,000 companies penalty notices in error, and was slow to acknowledge its fault.

The IoD has recommended an initial test period of around 4 years for HMRC to gain experience. During this period they suggest increasing the safeguards; leave £10,000 in bank accounts rather than £5,000, and freezing accounts for 28 days rather than 14. However, they acknowledge this would “reduce the amount collected by DRD”, and HMRC seems unlikely to oblige.   

Matthew Howson is an associate in the private client team at Penningtons Manches

The firm writes a regular blog for Private Client Adviser