HMRC’s new accelerated tax payment rules could create Autumn cash flow crisis for businesses and individuals

Posted: 30/07/2014

By October this year, the bank balances of an estimated 43,000 UK taxpayers could be under threat as a result of HMRC’s new powers. Under HMRC’s ‘accelerated payment’ rules, which recently received Royal Assent, it will have the power to force businesses and individuals to pay disputed tax within 90 days of a ‘notice to pay’ being given.

As announced in the 2014 Budget, HMRC’s proposed new ‘direct recovery of debts’ (DRD) powers will‎ shortly enable it to confiscate unpaid liabilities directly from bank and building society accounts (including ISAs).

There are also persistent rumours that HMRC will soon withdraw its voluntary settlement opportunity scheme for Employment Benefit Trusts (EBTs). To date, this has enabled an effective moratorium on enforcement during such negotiations.

How does this affect you?

The requirement to pay upfront will apply retrospectively to any dispute which is still an open enquiry or is under appeal when the rules come into force. The rules will apply if the tax planning scheme in question has been notified to HMRC under its Disclosure of Tax Avoidance Scheme (DOTAS) or General Anti-Abuse Rule (GAAR).

The Treasury’s estimate that this will affect 43,000 UK taxpayers (33,000 individuals and 10,000 businesses) may actually understate the number of taxpayers affected as HMRC has made it clear the accelerated payment rules also apply to 'follower cases'. This is where someone has used a tax planning scheme - even if not notified under DOTAS or GAAR - which HMRC considers is similar to a case it has already won.

HMRC’s consultation on how it proposes to exercise its proposed new DRD powers was set to close on 29 July 2014, with draft legislation arriving in the autumn.  Be under no illusion that  the legislation is coming as similar legislation already exists in the United States, Australia, Sweden, France, the Netherlands and elsewhere.

According to the 2014 Budget, DRD 'will focus on debtors who owe at least £1,000 and have been contacted multiple times by HMRC to pay'. However, HMRC guidance indicates that ‘multiple’ could mean just four demands and this would include contact by either letter or telephone. HMRC concedes that, in the exercise of its DRD powers, it 'will ensure that a minimum credit balance of £5,000 is available to the debtor across all accounts'.

To be clear, that means a combined total of £5,000. Given the likelihood that HMRC will have made several demands for payment of most debts (even disputed ones) and the sums involved will probably be more than £1,000, this does not really narrow the field of potential victims under HMRC’s draconian new powers. HMRC’s own figures indicate that, of those persons owing more than £1,000, more than 73% have over £10,000 combined across their bank, building society and ISA accounts.

No room for complacency

Persons with less than £5,000 (whether before or after HMRC has debited their bank account in partial payment of their tax liability), should not think they can escape the clutches of DRD.  While HMRC has made it clear that it 'will usually seek to collect the debt in a single lump sum' and individuals should not be exposed to an HMRC snatch and grab below this level, DRD will be exercised to pay debts effectively in instalments if HMRC’s analysis of the taxpayers accounts 'suggests that regular deductions could be made'.

Joint accounts are not excluded from DRD as HMRC has made it clear that 'where a debtor holds an account with another person, 50% of the credit balance could be used to pay the debt'.

These latest steps by HMRC follow on from its announcement in December 2013 that junior partners failing to meet at least one of three conditions (most notably not having capital contributions of at least 25% of ‘profit shares’) will be classed as employees and subject to PAYE deductions. Detailed anti-avoidance provisions regarding this treatment have also been introduced in the Finance Act 2014.

Time to pay

The combined effect of HMRC’s latest moves will be of concern to many UK businesses and individuals even though it has said that it will use its discretion under time to pay arrangements (TTP). Given that the arrival of accelerated payment notices and DRD is simply a reflection of HMRC’s gradual toughening up of its approach over recent years (including progressively shorter TTP periods), a softer approach on TTP arrangements would appear to be a contradictory and unlikely move.

We shall simply have to wait and see which expire first: the TTP arrangements granted by HMRC, including those generously permitted on such accelerated payment notices and DRD action, or the time it takes for the taxpayer to have his assessment finally determined in a tribunal challenge.

possible consequences

Christmas trading – the timing and impact of accelerated payment notices is likely to leave many businesses short of cash to fund stock for the busy Christmas period. This could lead to significant trading difficulties and consequential financial issues both in the lead up to Christmas and through early 2015 (by which time DRD will also have started to bite).

Insolvency – it is likely that any business hit by an accelerated payment notice would already be subject to a ‘contingent liability’ in an amount equal to such likely tax assessment. This could result in otherwise solvent businesses being considered insolvent on a ‘balance sheet basis’ and even on a ‘cash flow basis’ if a notice to pay is received and/or DRD is applied.

Dividends – dividends (even those declared from accumulated distributable profits) paid out to shareholders could be considered as unlawful and repayable if the company is deemed to be insolvent simply by being exposed to the 'risk' of an accelerated payment notice even if it has not already received such a notice. This would have serious consequences both for the directors who authorised such payments and the shareholders in receipt of such dividends.

Challenge – even the Government has stated that it expects a 'prompt range of different legal challenges' to these new powers and the proposed new powers. These include but are not limited to claims that these contravene the Human Rights Act. Businesses and individuals will need to consider carefully, however, both the cost and potential benefits of mounting a legal challenge.

We can help

If you have received a notice to pay or might potentially be exposed to an accelerated payment notice, we have the necessary experience and contacts to guide you through the possible options, whether in relation to TTP or other discussions or dispute with HMRC, alternative funding possibilities, dividend strategies, insolvency concerns and related solutions.

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