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Direct Recovery of Debts (DRD); increased powers for HMRC

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30 July 2014

In the 2014 Budget, George Osborne announced a controversial proposal to consult on new powers for HMRC where, if granted, would enable them to directly recover debts from the taxpayers’ bank and building society accounts.  The consultation, which closed on 29 July, has received a resounding negative response from most practitioners, professional bodies and taxpayers.  

Outline of DRD

Under the proposals, HMRC will have new powers allowing direct recovery of outstanding debts from taxpayers who have ignored previous tax demands.  They will be able to directly access the individual or company’s bank or building society account, providing there are sufficient funds to cover the debt.  This adds to HMRC’s already existing powers of being able to directly seize possessions to cover debts owed, but the proposals will  further this by negating the need for them to obtain a court order to recover cash. 

The proposals are expected to affect 17,000 tax payers a year with an average tax liability of just under £6,000.  HMRC has estimated that around 8,500 of those affected have more than £20,000 in bank accounts.

When could HMRC use these powers?

HMRC propose that DRD powers should be used where all of the following are satisfied:
  • the outstanding tax liability is £1,000 or greater;
  • the taxpayer has been contacted by HMRC a minimum of four times (but it is suggested the average will be more like nine times);
  • the tax due is not in dispute;
  • a Time to Pay arrangement is not in place; and
  • a minimum of £5,000 is left within the bank account(s) of the taxpayer following the DRD
If all of the above apply, HMRC can instruct the bank or building society to freeze the required funds and will then contact the taxpayer for a final time to advise of the action taken and provide a 14 day window for any objections or full payment of the debt.

The Objections

There are a number of concerns with the proposals and a lot of negative press has been circulating from a number of interested parties.  It is clear to see why HMRC would want such powers, as it will save them time and money, however, the concerns are that there will not be sufficient safeguards in place to protect taxpayers. 

In particular, the objection process is unclear.  Although a taxpayer could object to the DRD notice, it seems that it is up to HMRC to determine whether that objection is valid. If they decide not, the only option is for a judicial review which would be time consuming and costly.

Other concerns include, but are not limited to, mistaken identity, reliability of bank information and incorrect figures for the tax liability.

What’s next?

We now have to sit tight and wait for the response to the consultation which is expected in the Autumn, along with draft legislation.  If the proposals go ahead, it is anticipated that the legislation will be included in Finance Bill 2015, so it is likely that the new powers will be introduced around this time next year.

If you have any questions or would further information on this, please contact Nick Haines on 01242 237661