Government battles to collect £22bn owed

The UK government’s failure to collect its debts from taxpayers has left officials from the Treasury and HM Revenue and Customs (HMRC) scrambling to recover some of the £22 billion owed.

Over £15bn in debt is due to HMRC in tax, overpaid tax credits and fines by individuals and businesses, with the Department for Work and Pensions and the Ministry of Justice accounting for the rest, according to data collected by the National Audit Office.

In its report, the public accounts committee wants the Treasury to develop an effective strategy to manage debt that is currently forcing the government to increase its borrowing.

Of the debts owed to HMRC, 61% were over 180 days old at 31st March 2013 and 88% of payments due to the Department of Work and Pensions (DWP) are outstanding from the same period. The amount owed to HMRC is not a result of avoided or evaded tax but arrears and is the equivalent to one fifth of the public money spent on health care.

‘The government is owed this massive amount of money but it has failed to take a strategic, cross-government approach to managing that debt and getting more money paid to the Exchequer,’ said the committee’s chair, Margaret Hodge.

‘Instead, its treatment of debt has been characterised by neglect and periodic large write-offs,’ she added.

Actions taken by HMRC

In a bid to recover the unpaid debts, HMRC has filed 4,147 winding-up petitions in the courts for businesses leading up to March 31.  According to finance provider LDF, this figure is an increase of 11% on the previous year when it submitted 3,733 requests. This continues to be the most powerful weapon for the HMRC in regaining their funds. Pushing a company to fold for unpaid tax bills forces a business to be sold and its assets liquidated in order to get back the amount outstanding.

Other potential tools in the HMRC arsenal aimed at retrieving money owed by businesses include forward notices, accelerated payment and direct recovery of debt – all of which will heap the pressure on struggling business owners.

‘HMRC is still under huge pressure to get all their tax receipts in and wants to be seen to be taking a tough stance against those who don’t pay up on time. This jump in winding-up petitions in the last year shows that it is now prepared to go to much greater lengths than previously in order to recover unpaid tax,’ said Peter Alderson, managing director of LDF.

‘Despite having other heavyweight tools at its disposal, such as the power of distraint which allows it to seize a debtor’s assets, HMRC appears to be taking an increasingly aggressive stance.’

While the government is under pressure to return its tax debts from the red to the black, many small and medium-sized businesses will be fearful of another squeeze on revenue.

As illustrated by recent research from Bacs Payment Schemes Limited, which showed the late payment debt burden shouldered by UK businesses as a total of £46.1bn, cash flow is one of the biggest ailments for companies.

Alderson said: ‘Even though the recession is now technically over, cash flow is still an issue for many businesses. Smaller companies in particular can be more prone to difficulties in paying tax bills on time – but that doesn’t mean that they aren’t solvent, successful businesses.’

‘Smaller businesses are often more vulnerable  to cash flow problems if just a few customers pay late, or if they have a big upfront VAT bill to pay in advance. They also tend to have fewer funding options to cover any short-term shortfall, as bank lending to SMEs in the form of overdrafts and loans remains in relatively short supply.’

Key improvements needed for database

HMRC and government departments will need to improve its information database on debtors, according to the committee report, after the National Audit Office’s find that records of 97% of HM Courts and Tribunal Service debtors were commonly missing one or more key pieces of data.

The report explains: ‘Departments should implement systems that collect the data they need to manage and target their debt recovery resources effectively and reflect debtors’ circumstances and ability to repay. The centre should ensure that departments share information and coordinate their debt management activities with a view to developing a single view of what each debtor owes to government as a whole.’

Unfortunately for the government, the predicament has left it in a no-win situation; continue to fail to collect debts quickly enough and be accused of poor management or react aggressively and have a stern finger pointed in their direction by businesses.

You can read the full report from the Public Accounts Committee via this link to the PDF.

Jermaine Haughton is a journalist and digital media professional.