Comments from ACCA to HM Revenue & Customs
ACCA remains to be convinced that the proposed measures are the best option to address the objectives of ensuring prompt payment of tax debts once they are legally due. The best solution to the current difficulty in economic recovery of small debts, balancing the wider needs of the economy against the level of powers appropriate to the executive without any judiciary oversight, would be to improve administration of the court system so to reduce the costs and delays associated with enforcement of HMRC’s existing rights.
The constitutional basis of the existing safeguards in recovery of tax debts protects taxpayers by ensuring that the activities of the executive are subject to review by the judiciary prior to enforcement. The prospect of that executive persuading the legislature to enact provisions which remove the judicial safeguard is deeply concerning. If the full cost of a county court judgment is too great to be economic, then some other form of review by an officer of the court should be considered as a part of the safeguards in any power to access bank accounts.
If HMRC is to be granted a discretionary administrative power to access private bank accounts with no judicial supervision then it must be exercisable only where there is clear legislative intent and no further involvement of the judiciary would ordinarily be contemplated. All appeal rights must have been explored and exhausted, and safeguards must be incorporated and demonstrably implemented to ensure that no further examples can arise of HMRC withdrawing funds from UK taxpayer’s accounts without their knowledge or consent, or seeking to rely on HMRC’s own dilatory conduct to deprive taxpayers of their appeal rights.
Operating all the appropriate safeguards in the volumes and on the timescales proposed by HMRC is likely to require significant resources from both HMRC and the deposit takers. The responses from the British Banking Association and Building Societies Association suggest that significant changes would be needed to their systems to operate partial freezing of many accounts, and that once software upgrades had been executed the costs to the private sector of operating this additional power would be considerable.
The phasing of expected Exchequer impact indicates a low to medium attrition rate of yield, which is inconsistent with the identified population of determined “high risk” actors currently benefiting from their behaviour. If the measure were to act as an effective deterrent yield would be expected to fall sharply. Allowing the process to become “business as usual” for some taxpayers would indicate a failure to address the underlying issue; non-compliant taxpayers would still gain an advantage over compliant taxpayers by retaining use of their funds pending recovery.
HMRC should demonstrate clearly that they have a properly costed and fully transparent plan for implementation of these measures. Their effective lifespan and resource cost should be analysed and disclosed, and statistical analysis of the costs and recoveries from the exercise of the powers published on an annual basis. There is widespread concern that the proposed measures go beyond what HMRC need in order to effectively protect Exchequer yield, and transparent demonstration of the utility of the measures will be an effective answer to those concerns.
The role of consultation
ACCA fully supports the aim of consultation in order to help to design and implement the most effective and appropriate policy initiatives. However, it is important to the process of effective and informed policy implementation that consultation starts as early as possible and with the full range of affected stakeholders engaged with the process.
The timing of the current consultation raises concerns about the commitment of HMRC to fully explore all possible options. The model of unilateral HMRC access to bank accounts appears to have been presented as a fait accompli, and it was confirmed by HMRC’s CEO, Lin Homer, at the Treasury Select Committee hearing of 8 July 2014 that HMRC is the source of this initiative. The consultation is stated to be taking place “during stage 2 of the process”. Stage 2 of course is “Determining the best option and developing a framework for implementation including detailed policy design”. ACCA cannot see in the consultation document any consideration of what other solutions are available and how it has been decided that this might be the best option. The document states that the tool will exist and will offer significant advantages to HMRC in administering the tax system. Unfortunately it appears from the issues identified by the BSA and BBA in their responses to the consultation that the proposals as set out are not currently feasible and will offer significant cost and resource burdens for the banking sector; issues which should perhaps have been identified at Stage 1 of the Consultation Process.
There can be no objection to HMRC, as one of the parties most closely affected by the operation of the tax system, putting forward its suggestions for improvements to that system. There is however an inevitable risk that trust in HMRC and its commitment to impartiality and transparency will be undermined where clearly partisan measures are accelerated to the point of Ministerial consideration without any balancing voices being heard by those who must ultimately bear responsibility for the legislative change.
The current landscape
The consultation states “It is only fair that those who don’t pay are pursued promptly…” That would indeed be fair, but highlights a regular theme of ACCA’s submissions in recent years: HMRC should be properly funded and resourced to adequately perform its rightful role as a credible and effective tax administration worthy of its reputation as a world leader in good practice and effective implementation of tax legislation.
Of course it cannot ever help that the legislation itself is unduly long, complex and ever shifting. UK tax legislation is notoriously voluminous and complex. That should not however be an issue if the tax administration were properly staffed with well trained, highly motivated and properly supported individuals each of whom fully understood both the extents and limits of their powers and the impacts that their action, or inaction, would have on different taxpayers, according to their individual circumstances. The gulf between this ideal and HMRC’s actual performance in terms of staff morale and retention is a matter of public record.
The way forward
So it is in this context of an under-resourced authority faced with continuing staff cuts and an ongoing deluge of legislative change and extension that the current proposals must be assessed. It seems unlikely that there will be any rapid change of heart from government, whatever the outcome of future elections. HMRC’s resources will continue to decline while the volume and complexity of the legislation and accompanying bureaucracy that it has to administer looks set to grow.
HMRC as an organisation cannot be blamed for the position it finds itself in, but neither can the individuals now attempting to cope in that situation be excused for the many failures to follow best, or even acceptable, practice in dealing with the affairs of taxpayers.
Which brings us to the issue of the direct recovery of funds from private bank accounts. Viewed within the context of its existing powers, HMRC should not need this additional power to recover funds, yet we are told that as a consequence of resource related administrative difficulties not just in HMRC but elsewhere in the legal system the existing mechanisms are no longer practicable.
In seeking to resolve the difficulties faced by HMRC in recovery of debts from those with the means to pay, care must be taken to avoid “the politician’s fallacy” – something must be done, this is something, therefore it must be done. There are a number of potential routes to resolve the current difficulties, and the reasons for discounting the alternatives have not been publicly explained.
The consultation paper puts forward a compelling case for the new powers in respect of a small, clearly identified, section of the tax-owing population. In isolation, the arguments appear reasonable. But we have just gone through a lengthy exercise of setting the context for these proposals. HMRC has many other powers at its disposal but a shrinking resource to apply them. Too many published judgments from the Tax Tribunals concern cases where officers of HMRC have exercised powers inappropriately, or failed to exercise discretion where they should. More worryingly, there are often fundamental errors in the information on which HMRC relies. HMRC’s own computer systems are unable to communicate fully and effectively with one another. Information known to one part of HMRC cannot be attributed to another.
ACCA understands that in order to identify taxpayers who may have adequate funds to settle an outstanding liability HMRC will be relying upon the Section 17 and 18 returns of information, previously used to cross check interest declared against submitted tax returns. Interrogating a static database of historic information is clearly going to be less complex, costly and disruptive for both deposit takers and HMRC than attempting to match from ‘live’ account information for the whole population of outstanding tax debtors. However, the information held from those returns can be up to two years out of date and may paint a very different picture of the taxpayer’s circumstances to their current reality. There is clearly a risk of both missing the intended targets and selecting those who no longer have (or even potentially never had) the means to pay the sums assessed by HMRC.
Time and again during questioning by the Treasury Select Committee, Lin Homer, emphasised that the target of these measures is a hard core of taxpayers who simply sit back and wait for HMRC to either get a court order or decide to write off the tax as too small a sum to be worth collecting given the costs and delay associated with court action. While such taxpayers are clearly a legitimate target for action, the yields identified in the Exchequer Impact are not apparently consistent with their being the sole population affected.
Two wrongs do not make a right. If the court system is too slow and expensive to be an effective use of HMRC’s time then the correct answer is to improve the operation of the court system, not bypass it. The answer may lie in extending the reach of the Tax Tribunals, or perhaps review by a judge or Master in chambers. But once one arm of government has had appropriated to itself the right to take funds without supervision, simply because supervision is inefficient, there will be no bar in principle to other executive agencies of government from requesting, and presumably receiving, similar powers.
The instance of any taxpayer being so determined to abrogate their duties to society and the law as to wilfully ignore repeated attempts by the authorities to collect that which is legally due should be so exceptional as to merit wholly exceptional processes to counteract it. If HMRC finds itself in a position where its authority has been so discredited as to leave taxpayers treating its exercise of lawful duties as irrelevant then the solution must be to endorse and validate HMRC’s actions through the independent ratification of another trusted arm of the state.
HMRC’s frustration with the actions of a tiny minority of taxpayers, while understandable, does not justify the extension of its already considerable powers; rather, the solution should be re-education of the defaulting minority. The validity of HMRC’s role in society is more effectively confirmed by third party ratification of its actions than it is through unilateral assumption of potentially unconstitutional powers the misapplication of which could have catastrophic consequences for innocent parties.
The case study seems to illustrate that HMRC will expropriate funds to the extent it deems fit; the “debt” need be subject to no independent or third party input or review whatsoever. HMRC have clarified that they will not pursue funds if the taxpayer queries the debt and subsequent statements seem to have confirmed that direct recovery will not be used where there is any dialogue at all with the taxpayer.
However there must be a concern that a policy of abandoning direct recovery where a formal dispute has started would simply push those taxpayers who currently ignore HMRC into starting correspondence. The next problem here would be attempting to distinguish genuine technical or factual disputes from spurious arguments.
The mere existence of a power to remove funds where taxpayers refuse to engage with HMRC would presumably incentivise taxpayers to engage. This would be good. However, it does call into question the long term value of the power unless HMRC are proposing to use it in respect of disputed cases – but there is already a set process for settling disputed cases, involving the tax tribunals.
Process and administration concerns
HMRC have indicated that there will be between 4 and 9 “taxpayer contacts” before DRD is considered. There is no reference in the consultation paper to how will this interact with HMRC’s preferred option of digital communications. Assuming practice follows the model of “contact” meaning taxpayers having to access an HMRC secure mailbox in order to actually read their mail (rather than simply receiving a text message or email alerting them to its presence) it should be possible to confirm rather more accurately than with “snail mail” that taxpayers have (or have not) been “contacted”. This still leaves the issue of how HMRC will deal with taxpayers who habitually check their HMRC mailbox just once or twice per year, a reasonable enough practice for those who only have to pay tax once or twice per year.
Long term future of the practice
It seems perfectly reasonable that HMRC should be able to enforce its debts against those who have not queried the amount, but are simply declining to pay. But it is not clear how long lived the collection of tax from 17,000 taxpayers a year will be. If the measure is an effective deterrent then the number of taxpayers against which it will be used will fall very rapidly.
HMRC have indicated that all DRD cases will be operated by a dedicated specialist team. If HMRC estimates are accurate, this team will be dealing with 17,000 cases per year, or around 60 per working day. Depending upon the number of objections and hardship cases, this could call for a full time team of anything from 6 to 30 trained specialists, and more likely at the upper end of that range given the reputational risks to HMRC of errors in the process and consequential need for prudence in the earlier years of operation.
While the deterrent effect of the power may be considerable, and the exchequer gain of £375m over 5 years compares well to an expected additional cost of £800,000 over the same period, it is quite obvious that operating a team of anything like the size required will cost considerably more than £160,000 per year (or less than £10 per DRD case). There must be some opportunity cost to HMRC in diverting resource from elsewhere in the organisation to handle the administration of DRD, and in a department already shedding staff at a concerning rate that is a cause for further worry.
The Impact Assessment by its nature provides no more than a summary of the expected costs and benefits. ACCA would welcome a deeper understanding of issues such as how the £800k cost is to be phased. What is the underlying cost, and what is the offset against the “yield” of £375m? Based on those two figures alone, HMRC’s costs look to be very broadly 1/3 of, say, the costs of administering PAYE (based on 2012 figures of £132bn yield vs £1bn HMRC collection cost). Overall PAYE costs businesses a lot of money, whereas the external cost to the taxpayer of DRD can be reasonably estimated at nil (by definition if they are refusing to engage) although we do not currently have any reliable estimates for what burdens DRD will be laying on the deposit takers. Indications from the BBA and BSA are that the costs both of initial systems change and ongoing administration will be significant additional burden. The overall efficiency of HMRC’s ratio depends on any offsets. If the net yield of £374.2m is after £3m of costs offset within the “yield”, then that disguises a ‘true’ picture of £3.8m cost to collect £378m tax, which is considerably less compelling.
The long term future of the measure is also unclear. Once fully implemented HMRC clearly envisage some level of deterrent effect resulting in diminishing returns (from £120m down to £90m over the three years covered in the impact assessment) but if the power is effective it is unclear why affected taxpayers would not simply pay up themselves at an earlier stage in the process, since the operation of freezing orders on a business bank account would doubtless be a factor taken into account in external business assessments of credit worthiness. Given the apparently determined nature of the target population and the narrow scope of the rules one might expect a high attrition rate on returns, but the attrition rate identified in the Assessment of Impacts seems instead to fall in the Low category as used in OBR policy costings for anti-avoidance measures.
Anyone determined enough to consciously disregard all HMRC’s attempts to enforce payment is equally likely, once they discover it is an effective tactic, to write a single letter disputing the liability. No further action would be needed on their part until all appeal rights had been pursued and exhausted. The net result in terms of communication with the taxpayer and the Tribunal would probably be more cost to HMRC than is currently the case. Where the taxpayer’s strategy is already based on an assumption that the debt is too small to justify court action on HMRC’s part, this will be an equally uneconomic use of taxpayers’ money.
Equally, the idea that a business would deliberately pay every quarter’s VAT liability a few months late seems economically unsound. Given the existence of penalties and the surcharge regime, while the business may be sitting on an apparent cashflow advantage of two to three quarters, that will in reality be illusory since the additional penalty liabilities will add to the lifetime liability of the business. Indeed, unless the business is consistently growing at a rate equal to the percentage rate of penalties, paying an old bill plus penalties may well be costing more than paying the current bill on time. Perhaps in such a case HMRC would do better to resurrect their historic role of educating taxpayers.
It is perhaps not totally implausible that HMRC and the taxpayer may come to some effective accommodation over time that the lowest perceived net cost to all parties is for the tax authority to simply take the money it wants directly from the taxpayer’s account after due passage of HMRC communications. However this would not address the fairness issue that the recalcitrant debtor retains use of their tax monies for far longer than a compliant individual. Allowing a practice to grow up where HMRC consider direct recovery to be “business as usual” for 17,000 taxpayers would in itself be a failure of the system, particularly once the risks of collateral damage to those innocently caught up in the process are taken into account.
Who are the targets
The clues as to HMRC’s expectations for this policy are somewhat sparse. While the body text suggests that corporation tax and PAYE would be within the scope of the measure, the impact assessment places all 17,000 of the expected cases within the “Impact on individuals and households” section. While an impact on businesses is not ruled out, no companies impacts are identified in the table whereas a risk to small and micro “firms” is at least considered. HMRC asserts that the majority of affected individuals will be self employed; the balance presumably will be wealthier individuals in receipt of capital gains or investment income who have chosen not to settle their liability.
The impact of the measure on lower income households should be a concern. The self-employed typically earn less than those in employment. They are also perhaps more likely to be in need of competent professional advice in respect of their tax and financial affairs, but least able to afford it (or even appreciate their need). MPs and accountants alike have been quick to offer examples of individuals they have had to try to help who have fallen behind with tax affairs as a result of misfortune and simply stopped responding to any official communication.
While this may not necessarily excuse a failure to pay that which is owed promptly, or at least address the issue, it should feature in HMRC’s assessment of the likely impacts of the policy. There must be an enhanced likelihood that a household triggering HMRC’s hallmarks for application of the power will be one that is already struggling in one way or another, and if the first they learn of HMRC’s actions is as a result of a block on their bank accounts then it is perhaps unlikely that they will all of a sudden overcome whatever concerns have prevented them contacting HMRC until now (or even understanding what is going on – how will HMRC ensure that the banks are able to effectively communicate with their customers)? There is no greater likelihood that they will make a hardship application in time than there is that they will pay off the debt.
It is even more concerning that HMRC are proposing use of this power in respect of tax credit debts. The scope for problems will be even greater when dealing with those who are already at the most vulnerable and disadvantaged end of the social spectrum. The safeguards must ensure that HMRC is offering a helping hand where needed, not making an already difficult situation worse for a tax credit claimant who might have run up the liability as a result of innocent error.
HMRC does have a role to play in the effective collection of tax, but that cannot be at the cost of making difficult situations worse for the most vulnerable of their constituents. As HMRC themselves have been so very quick to point out, going to court is slow and expensive – but if HMRC have helped themselves to cash which would not on equitable principles be due, that will be the only avenue open. The prospect of HMRC compounding their errors and the misery of others by forcing them into the very court process that HMRC itself considers unsuitable for purpose is not one which sits comfortably with principles of responsible and proportionate administration.
If this power is to act as an effective deterrent then it will not need to be invoked, the staff required to operate it will be tiny and its actual yield will be minimal. If it is simply to become a “business as usual” element of HMRC’s day to day operations then this is no more than an acceptance of the failure of HMRC’s current administrative and educational functions and indicates a more worrying underlying acknowledgment of HMRC’s inability to effectively discharge the responsibilities commensurate with its powers.
It is of course unfortunate that HMRC’s call for powers to chase liabilities which it considers due comes so soon after the difficulties with implementation of NPS, and the resultant writing off of so many HMRC debts. It might be considered a further misfortune that during the currency of this consultation the NAO’s annual report on HMRC’s accounts has highlighted a surge in discharged debts, along with a failure to properly calculate the baseline of overall tax recoveries by a margin of some £1.9bn. Such persistent documented failures to properly estimate and account for taxes due will of course do nothing to persuade defaulters of the credibility of HMRC threats to chase outstanding liabilities, and may even lead some of those facing action for recovery of overpaid tax credits to doubt the validity of the initial assessments.
Interaction with insolvency
It is perhaps inevitable that HMRC will find itself in a position of potentially deploying its new power against businesses on the brink of collapse. HMRC have been keen to reassure ACCA that the new power is not designed as or intended to be a recreation of the historic advantage of Crown preference. However it is hard to see how that effective impact can be avoided without extensive due diligence verging upon supernatural prescience given the two year period for setting aside of vulnerable transactions.
Once insolvency proceedings are under way, it will be open to an office holder to apply to the court for set aside of transactions which can be presented as amounting to an unfair preference, up to two years before the onset of insolvency. ACCA welcomes the informal assurances it has received that in any such case HMRC would look to return funds to the creditors pool in order to avoid any possible preference, and looks forward to the opportunity to comment on the draft legislative clauses which would be needed to give any such assurance the weight it deserves.
Is 12 months’ worth of account information sufficient for HMRC to establish how much the debtor needs to pay upcoming regular expenses?
In the case of a large and well established business with a mature business model, consistent customer base and effective forecasting and cashflow mechanisms then a 12 month snapshot of transactions may well give a broadly reliable guide in a majority of cases.
However HMRC have indicated that the majority of DRD cases will be targeted on self-employed individuals in respect of personal income tax debts. Any number of changes to personal circumstances can be envisaged which might make one year significantly different to its predecessor – a move of house, increasing childcare costs, growth or reduction in business, resulting in greater short term cash costs or income, and so on. Small business cashflow will inevitably look more “lumpy” than for a larger business, as the proportional impact of capital expenditure is likely to be far higher – for example purchase of new machinery or vehicles. Given the lower overall volume of transactions any individual bad debt is likely to have a greater proportional impact on the viability of the business.
There is also a more fundamental concern over the HMRC access to bank data, which is the extent to which this information will be shared elsewhere in HMRC or could form the basis of “fishing trips” which might trigger further enquiries. The consultation document example of a “typical” usage of the powers describes an unchallenged assessment which is then to be used as a means to access 12 months worth of detailed financial information. It is by no means unusual for taxpayers or their advisers to successfully resist HMRC demands for unrestricted access to banking information in enquiry cases on the basis that it is not relevant to the taxes or periods under enquiry.
ACCA understand HMRC’s intention to be that any information received in connection with a debt recovery action will be reviewed only by the dedicated team within the Debt Management & Banking (“DMB”) team and destroyed immediately any decision has been made. Currently, the procedural separation of DMB from the front line compliance teams is often a cause of concern for taxpayers and their agents as DMB teams chase debts which compliance colleagues have indicated to the taxpayer are no longer a concern. Clearly to the extent that this now stands as evidence that HMRC is able to maintain separation of information it may serve to comfort some concerned commentators, although there will of course be those who will continue to harbour suspicions that in the light of HMRC’s increasingly hard line with tax payers and agents, tax officials may be unable to resist the temptation to avail themselves of relevant information, whatever its source. ACCA is unable to offer any quick solution to such suspicions but merely encourage HMRC to do all it can to rebuild damaged trust.
There is however a tension here between HMRC’s duty not to misuse information, and its duty not to ignore important information which it does have. Although HMRC have used as their initial justification the class of taxpayers who have made a conscious decision not to pay tax which they know is owed, the illustrative example in the consultation document is indicative also of a desire to use the powers in situations where HMRC has estimated a liability without any dialogue with the taxpayer.
It would also seem sensible for HMRC to consider not only whether the debtor will be able to service other upcoming expenses, but also to consider whether the account information actually undermines HMRC’s assessment of the liability. For example, an assessment in respect of VAT will necessarily require that the business turns over at the very least five times the sum assessed, and more likely makes a pre-VAT profit (incomings less outgoings) of five times the amount assessed.
If it is clear from the banking information supplied that HMRC’s estimated assessment is unrealistic then there should be triggers in HMRC’s analysis of the accounts to ensure that DRD is not pursued; to do so would be a clear abuse of the powers and an abrogation of HMRC’s duty to behave in a reasonable fashion. The consultation document gives no indication that any such analysis is proposed, or how such a safeguard might be implemented.
Is 5 working days sufficient time for deposit takers to comply with account information requests?
While this must primarily be a question for the deposit takers themselves, HMRC’s suggestion that 5 working days will in all cases be sufficient to deal with what may be complex enquiries, and which quite clearly will need to involve a degree of safeguarding and checking on the part of the request recipient to ensure no duties in respect of data confidentiality are breached, does appear to indicate that HMRC will be pursuing such cases to a timeline which is considerably swifter than that applied to most taxpayer affairs. For such alacrity on the part of deposit takers to be warranted is a further indication that HMRC propose to fully resource the DRD specialist office with dedicated staff who are able to respond instantaneously to every development on every case, with the concomitant cost and resource implications for the department.
Before agreeing in principle that such a timetable is reasonable, we would need to be reassured that HMRC will themselves be devoting appropriate resource to their side of the process, and not simply imposing a disproportionate burden on private business without any realistic prospect of commensurate benefits accruing to the administration of taxes in general.
By leaving a minimum balance in a debtor’s account, HMRC needs to strike a sensible balance between avoiding putting taxpayers into hardship and collecting money owed to the Government in an efficient manner. Is £5,000 a proportionate and appropriate sum to meet these objectives?
In genuine cases where the taxpayer is simply declining to pay despite knowledge of the debt and availability of funds, leaving £5,000 available in the short term should be sufficient for most individual taxpayers to avoid starvation. It would not of course leave enough to fund any court action required to reverse the effects of an erroneous exercise of HMRC’s power. It is assumed that HMRC will properly and effectively operate the pre-freezing due diligence in respect of regular expenditure, and process hardship applications swiftly and sympathetically.
However, as with so much in these proposals, the important elements will be the safeguards which control the application of the powers. For any business with a payroll in excess of £60,000 (including employers’ NICs) £5,000 will cover just one monthly salary run, and inability to pay salaries will have a disastrous effect on the business. HMRC makes the point itself that destroying businesses is bad for the economy. Disrupting a payroll will affect not only the business itself but also all its employees.
Non-receipt of a salary payment is likely to trigger knock-on effects for employees, as increasingly monthly outgoings such as mortgages and council tax are timed to coincide with that regular monthly income. The legislation should include a specific safeguard to prevent DRD being operated directly against accounts used primarily for payroll purposes, since the freezing element alone of the power would do the harm to employees and the wider economy.
While the consultation document itself does not make this clear, we understand from conversations with HMRC officials that incorporated businesses of the type most likely to have such payroll costs and processes are scarcely represented in the population so far identified as potentially within the scope of the powers. The likelihood of HMRC needing to exercise the powers against a payroll account should therefore be minimal, and the safeguard will operate more as a symbolic deterrent to HMRC, strengthening the imperative to perform effective due diligence before exercise of the powers.
What changes will deposit takers need to make to their systems to administer this policy and will this impose any administrative burdens?
ACCA understands that many of the core and legacy systems currently operating in the UK banking system are not able to freeze only a part of an account balance. The wholesale and fundamental changes to core systems which this policy would require, and which no other government department or legal powers require, would clearly pose a significant burden on deposit takers. HMRC should be well aware of the difficulties involved in maintaining and updating historic computer systems and of the lead time required to properly implement changes of the kind required.
There is a risk that if the existence of certain accounts which are invulnerable to HMRC’s powers becomes known then such accounts will of course become particularly attractive to the target population (although there is no such difficulty for the authorities with the powers they currently have).
Is 14 days an appropriate length of time for the debtor to object to HMRC or pay by other means?
In practical terms, no. HMRC does not regularly process its communications with taxpayers so as to make such a timescale reasonable or appropriate. The majority of communications take at the very least seven days from the date of issue to reach advisers, and there is no indication that HMRC processes outbound communications to taxpayers any more efficiently.
ACCA has previously proposed the use of registered mail for important communications with taxpayers, and would warmly welcome the use by HMRC of registered mail for communications with taxpayers in respect of DRD powers. Use of registered post would be an important double safeguard for both HMRC and the taxpayer, ensuring on the one hand that the taxpayer is definitely aware of HMRC’s concerns and proposed actions, and on the other hand that HMRC will not proceed if the mail is returned undelivered. Use of registered mail would further remove the existing difficulties and uncertainties around the date of issues of important communications from HMRC where appeal periods are limited.
Given that a key mechanism for taxpayers to displace the implementation of DRD will be to raise a formal appeal against the relevant substantive HMRC decision, alignment of the response period to the usual appeals deadline of 30 days would appear appropriate.
What would be a suitable time limit for the deposit taker to comply with an order to release funds, either to the debtor or to HMRC?
If the funds are being released back to the “debtor” then release should be as near to instantaneous as possible. Release to HMRC should be at the cheapest option available to the deposit taker in order to minimise the burden on innocent parties.
What sort of sanction should fall on deposit takers who do not comply either with the initial notice to supply account information or the instruction to release the held amount to HMRC?
Any sanction should be proportionate to the reasonableness of the initial request. Given the difficulty (or in some cases impossibility) of complying with the regime as currently proposed the imposition of sanctions does not seem appropriate.
Is protecting a proportion of the credit balances of joint accounts the best way to protect non-debtor account holders?
ACCA appreciates the HMRC concern that use of joint accounts would offer an all too easy escape route for determined non-payers were the power to be available in respect of sole named accounts only. However it should also be borne in mind that execution of a freezing power on a joint account would represent a de facto breach of taxpayer confidentiality by HMRC. How would HMRC identify an account used by an amicably separated couple to cater for childcare costs, or save for long term expenses for the benefit of their offspring?
Moreover the assumption that the funds on the account are jointly owned may be erroneous. HMRC should of course be aware of “non-standard” ownership proportions in respect of tax bearing interest paying accounts part (or wholly) owned by higher rate taxpayers, or part owned by those whose income falls below the basic rate threshold, entitling them to receive a refund of tax deducted at source in respect of their share of the income arising on such jointly held account.
However there is no particular reason why HMRC would be aware of uneven proportions in respect of a jointly owned account which pays no interest, or in the scenario where both taxpayers have until now been basic rate payers under PAYE and an unexpected capital gains tax liability has arisen. In the case of childcare provision such as that discussed above, setting aside the trust aspect implications of the proposals, the intention to use direct recovery in respect of tax credit debts raises the prospect of the higher earning parent’s contributions to their children’s welfare being hijacked by HMRC.
If HMRC wish to access joint accounts then they must be absolutely certain that the taxpayer is aware of what HMRC propose to do in respect of that joint account before application of any freezing powers. While there is of course a risk that the defaulter may move funds or otherwise attempt to evade payment of the tax at this point, it will then be clear to HMRC that the individual concerned is taking positive action to sidestep payment, justifying more robust collection processes. Failure to take every reasonable step to ensure that they are not prejudicing the interests of innocent funds owners on joint accounts will lay HMRC open to action for redress, in addition to significant reputational damage.
Given the use of personal data in respect of joint accounts, ACCA would expect to see reference to the Privacy Impact Assessment in the Other impacts section of the Assessment of Impacts. HMRC will also need to satisfy itself that there is no possible challenge under Art 8(2) of the Human Rights Act 1998.
Are these safeguards appropriate and proportionate?
Given the paucity of information in the consultation document itself it would be impossible to agree. ACCA understands from subsequent discussion with HMRC that many of the administrative procedures outlined in our submission are under active consideration, adoption of which should go some way to reducing the likelihood of HMRC error, and making appropriate redress when such error does occur. Nevertheless, the most important single safeguard in respect of HMRC access to bank accounts is independent review of the proposed action before it is done.
In addition to this, ACCA would propose a number of other safeguards. In the early stages of operation, in order to avoid the risk of causing significant hardship to those least able to cope, an additional filter related to the wealth of taxpayer, eg limiting application to those with more than £20k in the relevant bank account, would allow HMRC to test mechanisms without posing such a risk to taxpayers. The general taxpayer population has a massively disproportionate amount paid by a very few individuals (and the same holds true for corporation taxes) so we could perhaps expect the same to hold for this population.
Where HMRC can definitively prove a “bad attitude” on the part of taxpayers, if the sum at stake satisfies the Deliberate Defaulters’ threshold, consideration could perhaps be given to the ‘naming and shaming’ of those individuals who have demonstrably failed in their obligations. Alternatively HMRC could set a maximum amount for debts in respect of which DRD would be used, with a commitment to use the courts for larger debts. Court cases are in any event matters of public record.
HMRC have suggested that some of these taxpayers owe significant sums. Certainly if the power will be operating down to £1,000 but the average owed across the identified population is c£5,800 then (unless the distribution is almost exactly the opposite of the general taxpaying public) then there must be some high value claims covered within the identified population. If HMRC were to commit to taking court action to recover any debt over £X’000 having done DRD style account matching to confirm availability of funds then this would act as a strong deterrent, especially for businesses/sole traders for whom a CCJ will be a significant issue. The value of £X’000 would of course be set by reference to the cost of going to court, but taking into account the value of all the other tax HMRC will get in as a result. HMRC should also consider a publicised policy of taking smaller debts to court on a sampled/randomised basis, as a further incentive for smaller debtors.
Low value cases probably make up the bulk by number. In order to properly evaluate the economic case for the proposals it would be helpful to understand the breakdown of tax, tax credits, penalties and interest making up the typical £1,000 to £1,500 liability, and how much of the overall 17,000 cases they make up. DRD has clearly caught the public’s imagination. Simply knowing that if you ignore the taxman then the money will one day simply disappear from your account is in reality likely to focus the mind of many recalcitrant taxpayers. So HMRC needs to make clear to taxpayers that once their overall liability, including interest and penalties, passes £1,000 they will be at risk of freezing and removal of funds. HMRC will need to communicate clearly to taxpayers when that combined liability is reached (which will be comparatively simple to enable for digital communications).
As a further safeguard in early stages, a limit on the number of cases to two or three thousand per year would allow sufficient data to evaluate the success of the model without putting HMRC’s resource or reputation at undue risk. Knowledge that HMRC can only pursue so many cases will be a strong signal that they are not overreaching themselves in terms of capacity in early stages.
Fieldforce visits will be a good way to head off needing to use this power. Physical attendance at the taxpayer’s premises is an excellent way of working out whether HMRC have accurate contact details (which is not always the case) or of simply jogging the taxpayer into compliance.
Agent contact: no reputable agent will ever advise their client to do anything but pay a due debt. If HMRC’s records show an agent as acting, then they should as a first step contact the agent. Subject to consultation with the professional bodies and HMRC should consider the use of copied letters to both agent and taxpayer. Such communications are likely to prompt taxpayers into paying (especially where the agent has been told that the liability has been settled).
Internal communications within HMRC must be operated effectively. There should be an automatic check by HMRC across taxes to ensure that the taxpayer does actually have a net liability to HMRC. If eg CIS or VAT refunds will operate to clear or offset other liabilities then this should be taken into account. Such checks should also incorporate a cross check of NI numbers, UTRs & addresses and other registration details between all the taxes for consistency.
In order to incentivise quality of decision making in selection of cases for DRD, each instance should be subjected to an internal four eyes review. Credit should be given for “refusing” proposed applications. Records should be kept of who proposed and seconded each DRD application. For every case which triggers a successful hardship application or appeal, one “black mark” awarded, to be shared equally between proposer and seconder. As a part of the process HMRC should ensure pairings are rotated. At the end of the year each team member’s “black mark” total will be checked, and any particularly error prone pairings identified.
Ideally there should of course be no errors; the next best result would be that they are evenly distributed across the matrix. Any clear trends should merit further investigation. Assuming a team of say 10 full time officers, each individual would be reviewing 3,400 cases each per year (1,700 as proposer, 1,700 as seconder). Those volumes should remove any bias on the case selection side, so any trend can be attributed to the individuals’ own performance. ACCA notes also that this would equate to 15 reviews per day, every working day, with no time off sick. Resourcing is clearly going to be a key aspect of successful implementation.