A power too far

KEY POINTS

• Institutes and societies have responded negatively to the direct recovery of debts proposals.
• Allowing HMRC access to funds in taxpayers’ bank accounts without independent oversight was seen as unconstitutional.
• The wrong people were likely to be targeted; those who had already paid, or those who were vulnerable and needed help.
• The consultation was criticised for not inviting alternative solutions despite theoretically being a stage 2 consultation.

As the deadline for responses to the consultation on direct recovery of debts (DRD) approached, so the submissions from the major representative bodies were published. Many of them raised similar themes, but each brought their particular experience and understanding to bear on the topic.

Unconstitutional

One of most fundamental complaints was that the power being sought was unconstitutional.

According to the ICAEW, “HMRC should not have the power to collect debts from bank accounts without independent judicial oversight: this contravenes the constitutional principle of separation of powers”.

The Law Society also raised some more specific concerns:

“In addition to potentially breaching confidentiality obligations owed by the bank to the depositor/taxpayer, a request for details of all the taxpayer’s financial transactions may breach Article 8 (right to privacy) of the European Convention on Human Rights … [and] is likely to be considered ‘unlawful’ under the Data Protection Act for breach of confidence.”

The key demand from most respondents was that the new power should be subject to some independent oversight before the money could be taken from the account.

As the CIOT explained, this was not just because of the significant number of HMRC errors that all respondents anticipated:

“Even if HMRC made very few mistakes (and the evidence does not support this view), to strip away independent oversight of the use of such a power would still be unacceptable because of the potentially catastrophic effect, financially and emotionally, on any individual wrongly targeted or their household.”

Debts and their collection

Many of the submissions pointed out that what was described as a tax debt did not have to meet the definition that most people would assume it to meet. This was a particular concern of the LITRG:

“There is no suggestion that the demand has to be correct before it becomes an ‘established’ debt and susceptible to DRD. There are many situations in which a demand for payment outstanding on the due date for payment may not represent the actual debt owed by the taxpayer, and most of them involve vulnerable taxpayers.”

The ICAEW pointed out that this was evident from the example chosen by HMRC to put into the consultation paper;

“It is a serious concern that the central example in the consultation document of how DRD might operate (Case Study 1, Mr A) is of a determination of tax due, ie an estimate made in the absence of a tax return. The debt might be established under the workings of self-assessment law but the actual liability might be very different based on Mr A’s actual figures. Far from illustrating a case where DRD is appropriate, and illustrating how DRD and its safeguards would work, Case Study one shows clearly how the application of DRD could go wrong.”

The other, obvious, question was why HMRC did not use its existing powers to collect the debts.

The ACCA said, “HMRC has many other powers at its disposal but a shrinking resource to apply them”. The Law Society, perhaps slightly tongue in cheek, saw a business opportunity for its members:

“This power is not necessary as there are already streamlined procedures for recovery of tax due in the County Court and the High Court in England & Wales and the Sherriff Court in Scotland. If HMRC employees are unable to use the procedures effectively this suggests they need training. Alternatively, if HMRC’s own resources are now insufficient to operate existing procedures, the work should be subcontracted to lawyers who are able to operate them.”

The comparison with distraint cut no ice with any of the respondents. The ICAEW commented:

“Distraint (now, since April 2014, correctly termed “Taking control of goods”) is not necessarily intrusive, as HMRC cannot enter a taxpayer’s home or premises unless its officers are invited in or have a warrant … Most importantly, a distraint visit can in many cases be the first opportunity the taxpayer has of face-to-face contact with an HMRC officer and the chance to sort things out if the debt is wrong or the taxpayer needs time to pay.”

Wrong target

The main practical concern was that HMRC would end up targeting the wrong people. They would, in error, target those who had already paid or where the debt was disputed, said the CIOT:

“We can provide numerous examples of occasions where HMRC has sought to collect disputed debts, or even debts that have already been paid, despite repeated requests from agents to stop the collection process until the matter has been properly resolved.”

The ICAEW highlighted “brown envelope syndrome”:

“…they may not have fraudulent intent, but may have personal, heath or financial problems which mean they are terrified to contact HMRC. It is not unusual for such people to have mental health problems. Those in this category need assistance to sort things out.”

Several respondents commented on the problems of HMRC data, and LITRG gave a catalogue of examples, mostly drawn from the charitable work by Tax Help, including:

“In the case of Mr C, HMRC’s letters over a period of four months went unacknowledged because they were sent to the wrong address. Mr C had been moved to a care home. Matters were further complicated by the fact that Social Services had to apply to the Court of Protection for a Deputyship because there was no power of attorney, and HMRC were reluctant to accept either that the taxpayer now lacked capacity, or that appointing a Deputy would take time.”

Crown preference

Many of the societies commented that this seemed to be reinstituting crown preference, where tax debts took priority over other creditors. For example, the Law Society commented:

“To adopt the measure would unfairly place the state in a preferential position ... All other creditors must pursue their cases in the courts”

The CIOT points out that this is not recognised in the impact assessment which says that “there will be no impact on compliant taxpayers.”

Consultation process

Finally, there were significant concerns about the consultation process. The ACCA set out the background:

“The consultation is stated to be taking place ‘during stage 2 of the process’. Stage 2 ... is ‘Determining the best option and developing a framework for implementation including detailed policy design’. ACCA cannot see in the consultation document any consideration of what other solutions are available.”

The ICAEW raised the same point:

“HMRC has not explained why, if criticisms were valid in 2008, it is now thought appropriate to introduce this power in 2015. What has changed?”

The answer, say all the respondents is “nothing”, so let us hope the outcome is the same as it was in 2008.

Issue: 4463 / Categories: Comment & Analysis , direct recovery of tax debts , power too far , Admin , Compliance , Investigations