DRD: are you up to speed on direct recovery of debts?

AAT Tax Policy Adviser Brian Palmer talks us through the proposed HMRC plans for Direct Recovery of Debts (DRD) outlining some of the big concerns throughout the finance and accounting industry.

What is DRD?

As part of the 2014 Budget the Chancellor announced a proposal to consult over new powers for HMRC which, if granted, would enable the department to directly recover debts owed from taxpayers’ bank and building society accounts (bank accounts).

In mid May the DRD consultation document was published and set out in outline how the proposed measures might work in practice. The aim of the consultation, which closed today,  29th July 2014, was to  gather views from interested parties, like AAT, on the appropriateness of the proposals, the robustness of the safeguards and how best to implement the policy to ensure that debtors do not suffer undue hardship.

Setting aside any personal views, one can immediately see that what is being mooted is very attractive for HMRC, in that, it will cut their debt recovery costs by setting aside the need to seek court sanction to remove funds from taxpayer’s bank accounts.  In a recent Treasury Select Committee (TSC) meeting HMRC’s Chief Executive Lin Homer said that she expects her organisation to gather £375m over a four year period.

The mechanics of the proposals

In a nutshell the proposal is to permit HMRC to collect “established” debts using DRD powers if their previous attempts at collection by other means have proved to be unsuccessful.  Whilst I feel that the condoc failed to go into safeguards in any real depth it did state that between four and nine attempts will be made to contact the debtor before HMRC invokes the DRD powers.  Furthermore, DRD action would not commence until 14 days after they issued a final notice of impending DRD action to the debtor. HMRC will also only attempt the recovery action if it can establish that the debtor has funds on deposit in excess of £5,000.

Why the new rules?

From an HMRC perspective the proposals are very attractive. They will award the taxman greater power to collect monies they believe is owed to them at a lower cost and in particular they will stop people gaining a cash-flow advantage by “gaming” the system through delaying the time that they ultimately have to pay their tax.

HMRC feels that, in general, the British public want to see “wrong doers” pay their dues (as indeed do I) and is confident that such a premise automatically grants them ample support in the wake of a whole raft of tax avoidance scandals.  However, far from being readily endorsed the published condoc has been met with, at best, what can be described as doubt and scepticism by many, and especially from the accountancy and tax profession.

The concerns

AAT is particularly concerned that, despite assurances given in the published document, there will not be adequate and robust safeguards as the condoc was extremely light in this area.

The condoc has been met with a barrage of criticism over what is seen by many to be HMRC’s propensity to get things wrong.  At a recent ICAEW debate many recounted client experiences of being pursued for debts that had previously been paid, or that had never existed.  Of even greater concern was that those present heard about cases of mistaken identity or indiscretion by HMRC debtor collectors.

Even if I accept that the above instances are relatively rare, I am extremely concerned that the data that HMRC holds on taxpayers is often very poor and that this fact will mean that, despite HMRC’s attempt to make contact with taxpayers on many occasions taxpayers will remain unaware of the DRD action until bank funds are frozen or worse still seized.

A number of eminent barristers have voiced concerns that excepting the need for HMRC to be subjected to the scrutiny of the Courts is quite frankly a step-too-far.  This concern was articulated very clearly by John Thurso MP (Lib Dem) during the recent TSC meeting when he made reference to “..HMRC are asking to become judge, jury and executioner. Is it not very concerning that you are removing from the process that currently exists the legal process simply because it is slow and expensive?”  Do people not have the absolute right to expect the law to protect them…”

The way forward

Whilst I am not in the camp that just says “no” I am absolutely of the view that the current condoc has failed to set out clearly the case for awarding HMRC more powers.  I would like to see a further condoc issued in the autumn that recognises and seeks to address some of the fundamental concerns as outlined above, for instance, the lack of independent oversight, the design of a more formal approach to how the warning letters are sent, the inclusion of a final warning letter sent by registered post, and that banks receiving a notice to apply a freezing order should be required by law to notify the taxpayer concerned.

It would also address the biggest concern that I have, which is over the consultation process, which in my view has been flawed from the start. The original condoc was too lightweight in the area of safeguards, for instance failing to invite comment on independent oversight. It also seemed, in instances such as the 14 day notice period, to be deliberately provocative by pitching a date that was always way too short to be practical. In my opinion it would have been more appropriate and befitting of HMRC to have delivered a more reasoned and properly balanced initial paper. Had this have happened a much less emotive debate would have flowed.

To repair the damage I firmly believe that the consultation process needs to be extended to incorporate a second condoc that has clearly heard and responded to the chorus of concerns and which includes robust safeguards, starting with independent oversight.

Have a read of the full consultation document, and why not share your thoughts with us by commenting below?

Brian Palmer , former tax policy adviser for AAT..