Contractors, be wary of HMRC’s power to raid bank accounts
It’s been widely overlooked, but fortunately for them the Direct Recovery of Debts powers won’t in practical terms overly impact contractors who are a director of their own limited company, writes Jason Piper, technical manager of tax and business law at the ACCA.
People, not firms, are primarily in the crosshairs
In fact, although corporation tax is specifically identified as being covered by DRD - the power to let tax be collected directly from debtors’ bank and building society accounts, HM Revenue & Customs has for a long time encountered considerably fewer problems dealing with companies than recalcitrant individuals when it comes to collecting tax it says it’s owed. It is the latter group, individual taxpayers (and it appears benefit claimants in particular), who we expect HMRC most has in mind and will therefore target if these powers are granted from 2015-16.
However before contractors (as sole directors of their own limited companies) can breathe a sigh of relief, it’s worth noting that DRD would potentially give HMRC a foot in the door to expand this regime later on, and that’s why there should still be genuine concern about DRD from businesses.
‘Something should be done’
DRD, at its core, is about HMRC wanting a less costly way to recover taxes from taxpayers who won’t engage with them. Existing processes for enforcing debts against reluctant taxpayers involve the courts, and HMRC estimates that some 17,000 taxpayers each year reach a point where that would be the only legal (but not necessarily economic) way to get the money from them.
In some cases the debts are less than the costs of court action, and there’s also HMRC’s resource cost to consider on top. It’s short of staff and getting shorter, so those dedicated to chasing debts are depriving compliant taxpayers of staff to help serve them. On a cost benefit analysis, low value debts aren’t worth chasing – but from society’s perspective they should be chased. Allowing the culprits a free ride brings the whole tax system into disrepute. So far, we agree with HMRC that something should be done.
How DRD might work
The big issue with this power is that it would allow HMRC to access bank accounts to recover tax debts without any form of supervision or third party authorisation. The consultation paper put out earlier this year, which is pretty much all the authoritative evidence we have to go on, doesn’t contain much in the way of detail, but does give some clues as to how things might work.
A power like this will have to be enshrined in law, and writing that law is going to be potentially tricky. HMRC are going to have to identify who they want to target in the wording of the new law, and it’s not very clear how they’d define what they’ve been referring to as a “small core” of non-compliant taxpayers.
It might be obvious now what the law is aimed at doing, but tax law is littered with situations where what the law is meant to achieve and what it actually does in the cold light of day don’t line up properly.
HMRC’s current chief executive Lin Homer has given her personal assurance to MPs that there’s no intention at this time to use the power against anything but that frustrating minority of taxpayers who just sit back and rely on the assumption that HMRC’s costs of recovery would be more than the tax owed. She has said that HMRC neither wants nor needs to have the power to dip into everyone’s bank account.
‘A potentially invasive power that leaves us hostage’
But what we have to watch is that laws last longer than individual civil servants. Resourcing is a huge issue for HMRC, and there’s no sign that the steady cuts of the last ten years will be stopped let alone reversed. Once there’s a law on the statute books that gives HMRC the power to instruct banks on its sole authority to transfer funds to itself, then the pressures on future HMRC leadership, not bound by those personal promises, to use the power more widely could be intolerable.
That’s why the safeguards built into the law itself will be so crucial. It’s hard to see though how parliament could draft a statute within the constraints of legal wording that just targets taxpayers who have refused to communicate with HMRC – and if they did, it would be all too easy to for the delinquents to get around; they’d just write a single letter (second class postage!) to HMRC saying they disagreed with the assessment, then wait for the court order.
Somehow the new law would either have to distinguish in clear words between genuine engagement and a sham designed to postpone the inevitable, or just rely on HMRC’s discretion to restrict its use of a broader power. The latter would be quicker and easier to draft, but would leave us hostage to any future change of attitude at the top of HMRC.
So the worries aren’t just that even with safeguards, HMRC might not have the resources to make the current proposals work – it’s that lack of resources in the future might force them to expand the regime to other taxpayers and circumstances.
We don’t see DRD – as currently proposed – as an immediate issue for limited company contractors – or even their PAYE counterparts in umbrella companies. To some ContractorUK readers that will be reassuring, but do be on your guard because DRD might very well have a sting in its tail.
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