From the date of Royal Assent to Finance (No 2) Bill 2015, HMRC will have the power to instruct banks and building societies to deduct amounts to settle a person’s tax debts directly from their accounts.

TolleyGuidance has produced a guidance note on direct recovery of debt which provides details of how the process will work, including how the taxpayer can make an objection to HMRC.

Background

The proposal for HMRC to have the ability to instruct banks and building societies to deduct amounts to settle taxpayers’ tax debts directly from their bank accounts caused controversy when it was announced in Budget 2014.

The consultation on direct recovery of debts (DRD) was published in May 2014. For details of some of the issues raised at the time, see ‘A power too far’ by Mike Truman in Taxation Magazine on 6 August 2014.

The Government listened to the objections but was determined to push ahead with the policy. The summary of responses, published in November 2014, promised significantly strengthened the taxpayer safeguards. For commentary on these safeguards, see ‘Power drain’ by Mike Truman in Taxation Magazine on 26 November 2014. The draft legislation was published in December 2014, although it was subsequently not included in FA 2015, see ‘Still saying no?’ by Mike Truman in Taxation Magazine on 14 January 2015.

Instead DRD is to be legislated in Finance (No 2) Bill 2015 and is to come into effect from the date of Royal Assent. This guidance note discusses the provisions as published on 15 July 2015 as they will apply to individuals.

Whilst Finance (No 2) Bill 2015 renames the provisions as ‘enforcement by deduction from accounts’, this guidance refers to the provisions as ‘DRD’ as this is the term with which advisers are familiar.

Summary

Broadly, the DRD process (discussed in detail below, along with the meaning of the important terms) can be summarised as follows:

1. The taxpayer owes tax debts totalling £1,000 or more, which HMRC has been chasing by post and by telephone
2. HMRC visits the taxpayer to confirm that the debt (the ‘relevant sum’) is due and to check whether the taxpayer is ‘vulnerable’ (no vulnerable taxpayer will have tax debt collected via DRD)
3. HMRC issues an information notice to a ‘deposit-taker’, which requires the deposit-taker to provide details to HMRC of all accounts held by the taxpayer
4. HMRC issues a ‘hold notice’ to the deposit-taker which requires the deposit-taker to (i) either freeze funds up to the amount of the ‘relevant sum’ or transfer the relevant sum into a suspense account, and (ii) notify HMRC of the ‘held amounts’
5. HMRC must, and the deposit-taker may, then provide full details to the taxpayer and any affected third party, of the held amounts in relation to his accounts
6. The taxpayer and any affected third party then has 30 calendar days to make objections to the hold notice
7. If an objection is made, HMRC has 30 working days to consider the objection, which will either be dismissed or the hold notice will be wholly or partly cancelled
8. If the objection is dismissed or not fully upheld the taxpayer can appeal HMRC’s decision, taking it to the County Court (rather than the Tribunal)
9. Once the appeal route is exhausted, if the hold notice stands HMRC issues a deduction notice to the deposit-taker authorising it to pay over the amount in the hold notice in satisfaction of the taxpayer’s tax debt

A ‘deposit-taker’ is a person who may lawfully accept deposits in the UK in the course of a business, which is a regulated activity under FSMA 2000, s 22 and Sch 2. This covers all UK banks and building societies and any overseas banks which are authorised as ‘deposit takers’ by the Financial Conduct Authority.

Finance (No 2) Bill 2015, Sch 8, para 22

The DRD rules only apply to England, Wales and Northern Ireland. Taxpayers in Scotland are not affected by DRD as similar provisions already exist in Scotland (see below). However Scottish banks are ‘deposit-takers’ so it is not possible for a taxpayer living in England to avoid DRD by moving his funds to a Scottish bank.

Finance (No 2) Bill 2015, Sch 8, para 23

If at any point in the process the taxpayer pays off all or part of the tax debt, the amount held and/or deducted from the account will be reduced accordingly.

For the full guidance note, click here to find out when the new provisions will apply and how the process will work.

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is AAT Comment’s news writer.