HMRC powers: legitimate collection or a step too far?

HMRC now enjoys increased powers to collect tax it believes is due from confirmed or potential tax avoiders. Credit managers should be on their guard.

When faced with a large number of similar cases of alleged tax avoidance, it is often most efficient for HMRC to investigate representative cases, taking them to litigation if necessary. If HMRC is successful in the courts, unpaid tax and/or NICs will be recovered from the taxpayers in question. Traditionally, however, there has been little incentive for others using the same or essentially similar arrangements (known as ‘followers’) to accept the court’s findings and pay any underpaid tax and/or NICs to HMRC.

To tackle this problem, HMRC can now issue a Follower Notice to a person who has used an avoidance scheme that has been shown in another person’s litigation to be ineffective.

The Follower Notice tells the taxpayer that they may be liable to a penalty of up to 50% of the tax and/or NICs in dispute if they do not amend their return or settle their dispute. These powers enable HMRC to run a ‘test’ case in respect of an avoidance scheme and to enforce the decision against those using similar schemes.

Another important weapon in HMRC’s armoury is the accelerated payment notice (APN). This is a requirement to pay an amount on account of tax or National Insurance contributions (NICs) when HMRC considers a taxpayer to be involved in avoidance schemes. Following the issue of an APN, a company or individual is given 90 days to settle all amounts due.

Direct recovery of debts
The latest increase in HMRC’s powers comes through direct recovery of debts (DRD). This affects a small number of individuals and businesses who are making an active decision not to pay, or to delay paying, the money they owe. The DRD legislation allows HMRC to recover cash directly from bank and building society accounts in circumstances where the debtor owes £1,000 or more.

HMRC research reveals that the debtors who will be affected by DRD owe, on average, more than £7,000 and almost half of those have more than £20,000 in their accounts.

Following consultation, the DRD legislation was adjusted to introduce a number of steps intended to safeguard taxpayers and level the playing field for other creditors who may also be seeking payment from the same recalcitrant debtor. These safeguards include the following:
  1. HMRC can only take action against those who have ‘established debts’, have passed the timetable for appeals and have repeatedly ignored attempts to make contact.
  2. Every debtor must receive a face-to-face visit from HMRC agents before their debts are considered for DRD.
  3. Only debtors who have received this face-to-face visit, have not been identified as vulnerable, have sufficient money in the bank and have still refused to settle their debts will be considered for DRD.
  4. A minimum of £5,000 must remain in the debtor’s accounts after any DRD recovery.
Despite these safeguards, there is still some concern about HMRC’s ability to use its powers on joint accounts. HMRC has stated that it will identify the proportion of funds that belong to the debtor taxpayer, but how it will do this in a timely (and accurate) manner is open to question.

What does this mean for credit managers?
The ever-increasing powers of collection afforded to HMRC are enough to turn the average credit manager green with envy. But they are also important developments that could affect all those involved in the provision of credit, not only because of the potential impact on debtors’ abilities to meet their ongoing cash requirements.

Here are a few questions to consider:
  • Is or has your client ever been involved with a tax saving/avoidance scheme?
    • Such schemes were common in a number of trades or industries, so customers in those sectors are most at risk of receiving a Follower Notice or APN.
  • How will the removal of funds (by DRD) affect insured credit limits?
    • It seems likely these will be reduced.
Time will tell how well the new DRD powers operate in practice, but there seem some obvious snags. For example, HMRC will be reliant on the banks providing proof of funding, which is likely to take far too long for the information to be sufficiently accurate or reliable for enforcement action. In addition, if HMRC is now required to conduct face-to-face meetings and give notice of the intention to enforce DRD, the unscrupulous debtor is sure to divert funds or ensure their account balance is kept below the £5,000 threshold.