The UK tax system is complex and mistakes in law will happen. Not all taxpayers can afford an accountant or recourse to the courts to arbitrate
HM Revenue and Customs has published a consultation document on proposals to give itself powers to collect money directly from the accounts of taxpayers 'who are able to pay what they owe but have chosen not to do so' without a court order.
At present HMRC has a similar power of collection to every other creditor. They can levy distraint, which is to seize and remove a taxpayer's assets which are sold to pay the outstanding tax, without a court order. But this is a cumbersome and archaic process and expensive for the taxpayer as the assets are sold at public auction for what they will fetch and not necessarily for what they are worth.
Alternatively, HMRC can apply to the courts for a county court judgement. Again, this is a slow and expensive process, which HMRC says gives the taxpayer the time to hide their assets.
HMRC believes that collecting the money by the proposed new power of Direct Recovery of Debts will be quicker, cheaper and less invasive and they cite similar tax recovery systems in other countries. DRD is proposed to apply to bank and building society accounts and individual savings accounts both in the name of the taxpayer and joint accounts.
Regrettably, UK businesses owed money will have to satisfy themselves with the current laws rejected by HMRC. Is there not a case for improving the debt collection system for all, rather than giving preferential powers to the state? Why not amend existing powers rather than add more legislation?
HMRC says they will contact the taxpayer at least four times before they apply DRD. They say that the taxpayer can stop the process at any time by either agreeing to pay, agreeing a repayment schedule or by disputing the amount of tax payable (in the courts if necessary).
But as the notice to deliver a return, the reminder to deliver a return and every tax-due statement counts as 'contact', in practice the escalation to DRD could apply very quickly. The UK tax system is complex and mistakes in law will happen, as we have often seen in practice. Not all taxpayers can afford an accountant or recourse to the courts to arbitrate.
DRD will be applied where there is ’1,000 or more of tax or tax credits due to HMRC. HMRC estimate that the average amount of tax at stake per offender is ’5,800 and that it will apply to 17,000 cases a year. There seem to be too few people collectively owing a small amount of tax to warrant such wide powers.
Before DRD will be applied HMRC will contact the taxpayer's bank to determine spending patterns and the balance at account. HMRC estimate that approximately half of those affected have more than ’20,000 in their accounts, but over a quarter will have less than ’10,000.
This is an intrusive and arbitrary way to determine whether a taxpayer can afford to pay the tax. There is no mention of ascertaining who else the taxpayer owes, or the implications of paying the taxman before any other obligations.
If the taxpayer has more than ’5,000 in their account then HMRC will issue a freezing order to the taxpayer's bank. This will freeze the uncollected tax in the account. The taxpayer then has fourteen days to either pay or HMRC will take the tax.
In summary, HMRC are jury, judge and executioner, with limited safeguards. We expect that the application of DRD will disproportionately affect those least able to afford representation.
Mark Davies is managing director of Mark Davies & Associates Ltd