Mr Andrew Willis,

HM Revenue & Customs
Debt Management and Banking
Room 3/46
100 Parliament Street
London
SW1A 2HQ

22 July 2014

Dear Andrew,

Direct Recovery of Debts (DRD)

The Northern Ireland Tax Committee of Chartered Accountants Ireland is pleased to have the opportunity to comment on the above consultation document published on 6 May 2014. Information about Chartered Accountants Ireland and the Northern Ireland Tax Committee are provided on the previous page.

We would be happy to discuss any aspect of these comments and to take part in any further consultations/initiatives in this area that there may be in the future.

We have not addressed each and every one of the questions outlined on page 20 of the consultation and instead have focused on the matters we regard as key, specifically in relation to the necessary safeguards that should go hand in hand with such a power. In general we are supportive of proportionate measures which help ensure that all taxpayers pay the correct amount of tax properly due and owing. Our observations below are made in that context.

Whilst the proposed legislation appears to be targeted at individuals and businesses, we are mindful that there are other taxpayers such as bodies corporate, trusts and other structures from whom tax debt may be due. It will be important to ensure parity of treatment for “established debt” regardless of who the debt falls on. The response to this consultation document might sensibly clarify this specific point.

Question 1 – Is 12 months’ worth of account information sufficient for HMRC to establish how much the debtor needs to pay upcoming regular expenses?

We do not believe that 12 months’ worth of information is sufficient to establish this. Whilst this might be enough in straightforward cases, we would recommend in more complex cases information over a longer period would be required. It will also be critical to ensure HMRC staff involved in this review are provided with training on how to interrogate this information and spot patterns in spending. Up to date and accurate information will be a critical part of this. The overriding principle of this review should always be to err in favour of the taxpayer given the potential for hardship and reputational damage that could ensue.

In addition, data protection issues will need to be addressed not the least being for how long do HMRC intend to hold this information. It will be critical to ensure that such private information is not used for any other purpose than establishing a pattern of expenditure before exercising DRD. This information should not at any time be processed through the Connect system.

Clarity is also required over how this review will be conducted into bodies corporate and other businesses/taxpayers that may not necessarily have an established and regular pattern of expenditure.

Question 3 – 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?

It is not clear how an amount of £5,000 has been determined as a proportionate and appropriate sum to strike balance. In any case, the power should be exercised at all times to avoid putting a taxpayer into hardship, HMRC have other powers at their disposal to allow collection of tax debt in an efficient manner.

The consultation document is silent on whether a minimum of £5,000 will be left in all cases or whether more than £5,000 will be left in cases where the review of account information identifies that an amount of more than £5,000 is needed to meet future expenditure and avoid hardship on the taxpayer.

In actioning a hold on an account HMRC should instruct the financial institution to place a hold on a specific amount of money such that sufficient remains for the taxpayer to meet future expenditure and to clear any cheques already written before the hold instruction is issued.

Question 5 – Is 14 days an appropriate length of time for the debtor to object to HMRC or pay by other means?

We would suggest that as this takes the format of an informal appeal as with any other form of appeal this should be a 30 day period. The 30 day period should run from the date the letter is received by the taxpayer, not the date it is issued by HMRC. Furthermore, the notifying letter should be sent by registered post so that the time period for objection should be easily identifiable. A copy of the notifying letter should also be sent to the taxpayer’s agent, if one has been appointed.

We have concerns that setting a 14 day target for contact from the date of the letter would result in significantly less time being available to those potentially subject to the power as they are unlikely to receive the letter for several days thereafter. In the recent publication “Delivering Our Vision – HMRC Business Plan update 2013–14”, it is clear that HMRC is itself unable to achieve a 100% turnaround of post within a 15 day period; it would be remiss of the Department to expect a higher standard from taxpayers potentially subject to the use of this serious power.

As a general point we would suggest that before any hold is placed on a taxpayer’s account they are issued with a final warning letter and provided with a minimum 30 day period from the date the final warning letter is received to either formally appeal the proposed hold/potential attachment or pay HMRC by other means. A copy of this final warning letter should also be sent to the taxpayer’s agent; if one is appointed.

Only allowing a taxpayer the opportunity to object (and not even formally appeal) once a hold has been placed on their account would not be a sufficient safeguard to protect against not just potential errors but financial shortfalls and difficulties which could ensue both of which could be financially and reputationally catastrophic for the taxpayer concerned.

Question 8 – Is protecting a proportion of the credit balances of joint accounts the best way to protect non-debtor account holders?

It is our view that seeking to directly recover tax debt from joint accounts is fraught with difficulty and should be avoided at all costs for a number of reasons. Not least will it be difficult to establish the portion of the joint account actually contributed directly by the taxpayer but again privacy issues will ensue as HMRC are proposing to contact all account holders once a hold has been placed on an account. This could result in sensitive private and confidential tax information being shared with another party. It is unclear how this disclosure of information would sit with HMRC’s duty of confidentiality to taxpayers under Section 18 of the Commissioners for Revenue and Customs Act 2005.

Furthermore, what rights will the other party to the joint account have in this process? And what recourse will be available to them from an appeals perspective?

Question 9 – Are these safeguards appropriate and proportionate?

We are concerned about the lack of detail provided in relation to each of the specific safeguards outlined in section 4 of the consultation document and believe that in their current format the proposed safeguards are insufficient to protect taxpayers.

Level of contact

Firstly the consultation advises that a person will be contacted between four and nine times before DRD is applied. It is not clear from the consultation in what circumstances four points of contact will be considered sufficient to initiate the DRD process. Throughout each of these contact points it should be made very clear to the taxpayer that HMRC will consider initiating DRD for failure to pay. As previously mentioned, this process should include a final warning letter sent by registered post. This will ensure the power is fairly initiated for all taxpayers.

Specialist HMRC team and helpline

Whilst it would be proportionate to establish a specialist HMRC team and a dedicated helpline, more detail around the composition of these teams, their level of specialism and training and how the helpline will be run and managed needs to be provided.

Concept of established debt

DRD will only be used for “established” debts, however it is not clear precisely how debts will be established. Whilst the consultation does include a number of case studies, the principle of debt establishment needs to be addressed in more detail as this concept (for debts more than £1,000) will underpin the operation of the power. The rational for arriving at a limit of £1,000 also has not been outlined. This limit seems low in the context of the wide range of powers already available to HMRC.

For example; how will DRD interact with the new power contained in Finance Act 2014 which provides for accelerated payment of tax for arrangements within the disclosure of tax avoidance scheme regime and situations when a counteraction notice under the general anti-abuse rule (GAAR) has been issued. In particular it is worrying that DRD might be used in cases where HMRC consider a debt has been established by virtue of a counteraction notice under the GAAR legislation; use of DRD in such scenarios should be specifically excluded as the burden of proof in those cases falls on HMRC and not the taxpayer.

Right of appeal

A further safeguard mentioned in section 4 of the consultation is that the debtor will be able to appeal the use of DRD using the following means:

• no money will be taken until the debtor is notified;
• once the debtor has been notified, no money will be taken until 14 calendar days has expired;
• during this period, the debtor has the right to object to HMRC or provide evidence of hardship; and
• if the debtor objects and HMRC does not uphold the debtor’s objection, they will continue to have the right to judicial appeal on the use of DRD.

In relation to the provision of evidence of hardship we would suggest that the burden of proving this should fall on HMRC at the outset as they will have arrived at that decision on the basis of the aforementioned review of (at least) 12 months account information. Thereafter will it be appropriate for the taxpayer to be asked to provide evidence of hardship; what this evidence might be is currently unclear and requires clarification.

A further safeguard in deciding how much to recover is mentioned at Section 3.13 of the consultation document. This states that HMRC would only seek access to positive balances and will not create or increase overdrafts. In seeking access only to positive balances HMRC should take into consideration that many financial institutions impose rights of set off in situations where an individual has both a positive balance and an overdraft/debt with the same financial institution meaning often the positive balance is legally less than it initially appears to be.

As part of the process HMRC will review the debtor’s objection. This review should be carried out by a senior HMRC officer previously uninvolved in the debtor’s case as is the case with the Alternative Dispute Resolution process. A taxpayer should have the right to formally appeal this decision thereafter.

In relation to the availability of judicial appeal it is not clear precisely what format will be open to a debtor. However currently no formal appeal of any type has been provided for in the consultation document. This should be reconsidered and a right of formal appeal through the courts made available before a hold is placed on a taxpayer’s account. Once a formal appeal is initiated by the taxpayer the DRD process should be stayed pending the outcome of that appeal. As a general point, any amounts under formal appeal should be excluded from collection via the DRD process.

The final safeguard referred to in section 4 states that a debtor will be fully recompensed for any losses incurred as a direct result of an error made by HMRC. The explicit inclusion of such a safeguard is a clear sign that HMRC themselves are concerned that errors will occur. The DRD process should be designed in such a way to prevent any errors occurring. In cases of error, HMRC should be required to not only recompense from a financial perspective but to compensate the taxpayer for reputational or other causal damage. The remedies available to taxpayers affected by such breaches, whether by accident or oversight, should be robust and clearly outlined and should include an award of damages where appropriate.

We make all of the above observations in relation to the proposed safeguards in the context of the potentially serious consequences that could ensue both financially and reputationally from the use (not just) of DRD but the power to impose a hold on bank accounts and particularily in cases of error by HMRC.

Conclusion

Overall we wish to stress that we accept HMRC has a duty to collect tax which is legitimately due and that it should take firm action against those who can pay but refuse to do so. However the DRD process as outlined in the consultation document appears weak from a number of perspectives, not least being that there would be no unfettered independent oversight over HMRC’s ability to access a taxpayer’s bank account in order to satisfy “established tax debt”. Furthermore the consultation document fails to deal in any great detail about the potential such a power has for error.

Whilst the Assessment of Impacts at Section 5 of the consultation recognises that the measure will impact on deposit takers and “may carry an associated cost” no attempt has been made to quantify what that cost may be, nor to consider the potential for such charges to be imposed on the taxpayer themselves. Potential financial and reputational damage ensuing from the use of DRD at all stages of the process also has not been addressed.

The safeguards listed in the consultation are important but they are inadequate in their current format and do not offer the highest level of protection to taxpayers that should necessarily come with such a power. In addition, there needs to be clarity around every single safeguard and these should be enshrined in statute.

We note that HMRC cite the availability of similar powers in several international jurisdictions as a point of support for the introduction of DRD in the UK. Whilst this may be the case, in some of those jurisdictions preference as a secured creditor still exists for tax debt making a direct comparison inequitable. Thus, we are concerned that HMRC may seek to use DRD as a form of Crown preference. In addition, the international comparisons may seem helpful but there is a lack of detail of the appeals processes and safeguards granted to taxpayers in those jurisdictions.

Whilst a similar power is already used by the Department for Work and Pensions’ (DWP) Child Maintenance Group, the DWP in that function acts as an intermediary between two individuals. HMRC in using DRD would not be acting in that capacity but rather in pursuit of its own objective of collecting tax revenue; thus the comparison is not a direct one.

We note the comments of the Treasury Select Committee in their report on the 2014 Budget. We welcome the decision of the Committee to take further evidence on this.

In conclusion, this power has the potential to gravely impact on the relationships businesses/taxpayers have with their banks and other creditors. This could seriously prejudice not only future dealings and relationships between those parties but the very creditworthiness of that business/taxpayer.

Comparable powers of debt recovery exist in other jurisdictions. Meaningful lessons can be learned from bitter experience in those jurisdictions; this power should never be exercised such that it damages a business/taxpayer beyond all possible repair.

Freedom of Information

We note the scope of the Freedom of Information Act in regard to this submission. We have no difficulty with this response being published or disclosed in accordance with the access to information regimes. This response will be published on our own website and will be available to all of our members and the general public.

Do not hesitate to contact Brian Keegan brian.keegan@charteredaccountants.ie or Leontia Doran leontia.doran@charteredaccountants.ie of this office should you require anything further.

Yours sincerely,

Paddy Harty

Chairman

Northern Ireland Tax Committee

Chartered Accountants Ireland

Source: Chartered Accountants Ireland. www.charteredaccountants.ie