Direct recovery of HMRC debts from debtor’s bank accounts

Under the Direct Recovery of Debts (DRD) rules, Finance Act 2015, HMRC will gain the power to collect tax debts directly from taxpayer’s bank and building society accounts, likely from late September or early October.

The legislation is designed to target those who choose not to pay rather than are unable; HMRC research has revealed that debtors who will be affected by DRD owe, on average, more than £7,000 and almost half of those debtors have more than £20,000 in their accounts.

To act under the DRD rules, HMRC must have established a debt of at least £1,000 is owed. An information notice will be sent to the bank requiring details of the taxpayer’s accounts to be provided. A copy will not be sent to the taxpayer or their agent. A hold notice will then be sent to the bank requiring the freezing of the account for a specified sum. At least £5,000 must be left available to the taxpayer across all of their accounts. On confirmation from the bank, HMRC will send a copy of the hold notice to the taxpayer. An objection may be lodged with HMRC within 30 days; once this period has expired HMRC will issue a deductions notice to the bank requiring payment. Debts will be recovered from individual accounts before joint ones but HMRC can direct as to whether current or savings accounts take priority.

There have been objections raised to the legislation; many see it as a means for HMRC to circumvent the process by which other creditors are able to pursue a debt. Francis Hoar, barrister and author of a report on the DRD legislation for the Tax Payer’s Alliance, said “The greatest legacy of the Magna Carta is the principle that the executive is subject to the law as much as the people, and yet the Direct Recovery legislation places the Crown in a superior position to individuals and businesses in its rights to enforce debts. Most dangerously of all, it treats the individual property as the property of the state once the state has determined it so.”

Following these concerns, HMRC has revised the proposal to introduce a right of appeal to the County Court in specified circumstances, such as exceptional hardship and third party interests, perhaps reducing their advantage over other creditors. Other guarantees and safeguards have been introduced, including the need for at least one face-to-face visit before DRD powers are invoked wherein the debt is explained and options are discussed with the hope of identifying debtors in a vulnerable position in order to offer them help to settle their debts. The revised proposal also envisages a slower implementation in the first year to enable HMRC to gain experience and feedback.

However, there remain points of contention even with these concessions. Many of the safeguards are included in explanatory notes accompanying the draft legislation rather than the legislation itself (for instance the pledge to hold a face-to-face meeting is not in the legislation and HMRC must merely be “satisfied that the person is aware that the sum is due”) and can be changed without a resolution of the House of Commons. A further issue is the effect of these powers on ‘innocent’ individuals sharing a joint account with a debtor; HMRC proposes to identify the proportion of the funds in the account belonging to the debtor but no detail on how this will be calculated has been released.

According to Jonathan Isaby, Chief Executive of the Tax Payer’s Alliance, “HMRC made 5.5 million errors last year”. So whilst the provisions are targeted at recalcitrant taxpayers, it is likely that there will be those caught up who are unable to pay or not liable at all. As companies are treated as individuals in British law, an administrative error such as this, leading to a holding notice over a companies’ accounts and leaving them with just £5,000 for a possible 30 days, would prevent many businesses from paying debts and put them in serious danger of insolvency through no fault of their own.

If you may be affected by the new legislation then we would encourage you to contact us and speak with one of our experienced Practitioners who will be more than happy to provide guidance and advice. An initial consultation is provided free of charge.