The consultation paper on George Osborne’s plan to let HMRC raid your bank account to collect money that you owe them (or that they think you owe them) has now been published. It is open for consultation until 29 July 2014. Co-incidentally last Saturday’s Times told me that HMRC have dismissed MPs warning that “mistakes could mean innocent people’s bank accounts might be plundered”, saying, “We’re not going to be dipping in and out of anyone’s account. This is only about hard-core defaulters who have ignored a minimum of four requests for payment”.
Unfortunately it is not clear either how HMRC can ensure that a person is not identified as a “hard-core defaulter” by mistake or what they mean by a hard-core defaulter. The consultation document explains that 10% of taxpayers in self-assessment “file late or do not file at all, which can create a debt owed to HMRC”. That is not quite right. Not filing does not create a debt; non-filing entitles HMRC to make a determination (i.e. to make a wild guess at what you owe) and that determination creates a debt, the amount of which can be altered only by filing a return. So is a person who, for whatever reason, does not file a tax return a hard-core defaulter? Commonsense would say, “Of course not”. However that does seem to be how the government interpret the term.
A little unfair perhaps?
You are probably thinking that I am being unfair. HMRC say that they are going to send such a person at least four requests for payment. It appears though that the “at least four requests” included “letters reminding them that they are due to file a tax return and pay”. Many people get such a reminder in September and a further one in December. That’s two of the four requests. After the end of January, a taxpayer gets a penalty notice (request 3) and he gets a warning before HMRC make their determinations (request 4). Accordingly all four lives will have been lost before the debt has even been quantified. Of course HMRC say that in most cases a taxpayer will have received a minimum of nine reminders. In their Case Study he seems to have received a lot more than 9. So if HMRC want this power as a last resort, why should the law specify four reminders? In HMRC’s Case Study 1, they seem to envisage around 14 reminders. Many of us would be a lot more comfortable if it specified 14. With only 4 reminders (all of which can be reminders not that tax is owing, but that a tax return needs to be filed) mistakes are undoubtedly going to occur.
I suspect that HMRC’s view is that safeguards are proposed, so that mistakes can be rectified before any money is taken. Let’s look at another Case Study.
- Jane is widowed in March 2005. She had been married for 50 years and her husband had always handled all of the family finances.
- In April 2005, Jane receives a notice to file a tax return. So does her deceased husband. Jane writes to HMRC telling them that her husband had died and she has no income.
- In September 2005 Jane (and her deceased husband) receive a reminder that a return is due. Jane assumes that this computer-generated letter has been issued by mistake and ignores it.
- In January 2006, Jane receives a further letter reminding her that a tax return is due. She does not know what to do as her late husband always completed her tax return.
- In March 2006, Jane receives a penalty notice. She does not understand it but as it is for only £100, she assumes that it is correct and pays it.
- Jane’s daughter Jenny, who lives in Australia, does not want Jane to be on her own on the anniversary of her father’s death so she persuades Jane to come to Australia for a few weeks.
- On the morning Jane is due to fly to Australia, she receives a determination for £50,000. She does not know what to do. She phones HMRC in a panic. Like many 70-year olds she is not too comfortable with phoning people, particularly as she is going a bit deaf. She half hears a lady reciting a menu of different things, most of which seem irrelevant to her and which in any event she hears indistinctly. Eventually she pushes a number and receives a message that she is being held in a queue, she is the 25th person in the queue and she might find it easier to call back later. Jane does not want to miss her plane. She decides she will sort out the problem when she gets back from Australia in three weeks time.
- When Jane returns home, she finds that HMRC have taken the £50,000 from her bank account.
Of course HMRC will say that cannot happen as Jane is not a “hard-core defaulter”; she is simply a confused and frightened pensioner who is having to learn how to handle her own finances, having been insulated from that for the last 50 years. But legislation that enables HMRC to take Jane’s £50,000 is surely unfair legislation; it is irrelevant whether in practice HMRC are not going to use the legislation on Jane. A learned judge said many years ago that a person should be taxed by law, not untaxed by concession. It is surely equally right that if a person’s human rights are to be infringed, they should be infringed by law, not protected by HMRC’s discretion.
Not just hardcore defaulters
In any event, the consultation document does not say that the legislation is aimed only at hard-core defaulters. It makes clear that it is also aimed at “those who are in a position to pay but choose not to, or delay payment for as long as they can” and “those who deliberately avoid engaging with HMRC”. HMRC undoubtedly regard Jane as falling into the second of those categories. The first will of course include the small businessman desperately trying to keep his business afloat and paying bits fairly to all of its creditors (including HMRC) whenever it gets some money in, as it needs to get over its cash flow problems before it can thrive. The good news is that HMRC do not want to force viable businesses into insolvency. The bad news is that whether or not a business is viable is down to the judgement of an HMRC Officer whose job is to collect money due to HMRC and who has probably had no experience of having to juggle limited funds to try to keep a large number of creditors exercising patience. If the HMRC Officer judges that the business is not viable, HMRC will grab whatever cash is there. Curiously the last Labour government thought it unfair that debts due to HMRC should be given preference over debts due to other creditors and abolished Crown preference. The current government seem to be restoring it. I leave it to you to decide which political party pursues more “business-friendly” policies.
More to worry about?
There are a lot of other worrying things in the proposals. HMRC will “request” from your bank information about all of your accounts, including current and savings accounts and ISA’s, along with current balances and details of transactions within the previous 12 months. Goodbye bank secrecy! HMRC are to be given power to require your bank to hand over to them your bank statements for the last 12 months even though these do not include taxable income and have no relevance to your tax affairs. Currently the Human Rights Act 1998 gives you the right to respect for your private and family life, your home and your correspondence except where interference with that right is “necessary in a democratic society in the interest of … [inter alia] the economic well being of the country”. In order to collect taxes, is it “necessary” for HMRC to have access to Jane’s bank statements? Surely not. Even HMRC do not claim that. They say they need the information to ensure that they leave Jane with enough to live on! How generous; but surely nothing to do with “the economic well-being of the country!” So goodbye your fundamental human right to privacy. Big Brother has finally arrived (albeit a little later than George Orwell’s guess that it would take only until 1984 for the State to take control over citizen’s private lives). Incidentally, that word “request” seems to have acquired a new meaning. The proposal is that your bank “should be required to provide this information within five working days”. So in HMRC speech, “request” no longer has the connotation that a person is free to ignore a request; it now has the same meaning as “require” or “demand”.
There are two safeguards to protect Jane. The first is that she can “provide evidence to HMRC’s satisfaction that DRD action will cause undue hardship or that the debt is no longer due”. The second is that she will “continue to have the right to judicial appeal on the use of DRD”. It is not clear what this means. It appears to mean that she can apply to the High Court for judicial review of HMRC’s actions. But this is an expensive process that most taxpayers cannot afford to pursue, and HMRC are sitting on your money so you may well not have the resources to pay the legal costs and live for the many months that are likely to ensue before your appeal is heard.
Every year I go to an accounting show in Chicago. That is my annual update on US tax. A few years ago, one of the speakers was explaining how to get a time to pay arrangement with the IRS. You call them. You will speak to someone charming whose sole objective is to get you to tell him the name of your employer (so they can garnish your salary) or the name of your bank (so they can garnish your bank account). You must not reveal this information. If you achieve that, someone else from the IRS will call you back and agree a payment plan. HMRC do not need such a procedure. If you receive bank interest they already know your bank account details through the returns of interest that the bank has to make each year. If you do not have an interest bearing account but have given your bank details on your tax return to speed up a repayment due, or you are in business and pay PAYE or VAT, both of which are required to be paid electronically, they know your details too. What HMRC propose to do is to gather together all of the accounts that they know about, ask your bank, building society or ISA provider if they know of any others; look at the bank statements, decide what they think you need to live on, and grab the rest (up to the amount of the debt). If you are so old-fashioned that you want privacy and do not want HMRC to be able to pry into your private life, the only safe thing is to open a current account with a bank overseas and put your private finances though that account. HMRC cannot obtain access to bank accounts in another jurisdiction. Safe in this context is not an absolute term. Although HMRC cannot access your overseas account, the world is a shrinking place. They may be able to ask the tax authorities in the bank’s country to get the bank statements for them – although it is unlikely that the other country will let them grab funds from your overseas account. But make sure that your overseas account is not interest-bearing as there can be massive penalties if you forget to declare the interest on an overseas account.