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The New Direct Recovery of Debts: Too Much Power?

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This year, the government came up with a new DRD strategy, a scheme that would allow HMRC to directly access corporate and personal bank accounts and seize unpaid taxes without the need of court approvals. Despite the fact that similar schemes already exist in the U.S., Australia, or Sweden, the new scheme has made the subject of heavy public criticism and concern.

As new information became available, we can now explain how this new scheme will be put into practice and which the safeguards that come with it are.

Which are the reasons behind this scheme?

The Direct Recovery of Debts scheme was set in an attempt to strengthen the ability of HMRC to recover tax debts from those who refuse to pay their debts, thus ensuring that compliant businesses do not have to face unfair competition.

The mechanics of the DRD scheme

DRD will be used in the case of those businesses, partnerships, or individuals who owe more than £1,000 and have at their disposal sufficient funds to cover the debt. However, the DRD will only be used if HMRC has repeatedly attempted to arrange payment with the debtor but without success. The DRD process will allow HMRC to obtain all the financial information about the debtor’s building society, ISA, and bank accounts. If the total amount in the accounts is below £5,000, the DRD scheme will not be applied. However, if the balance is above £5,000, HMRC will proceed to holding the debt, but with the obligation of leaving a minimum of £5,000 across all the accounts. Once the debtor gets notified, he/she has at his/her disposal 14 calendar days to make payment arrangements or object. If the debtor fails to do so, the funds will be transferred to HMRC.

Safeguards

The safeguards include: repeatedly approaching the debtor before applying the DRD, leaving a minimum of £5,000 across the accounts, and the 14 days safety period before removing the funds. Should HMRC make any mistake, the taxpayer will receive compensation.

Reasons why this scheme has been highly criticised

Despite the above mentioned safeguards, the DRD scheme is still perceived as flawed by many legal practitioners, MPs, business groups, and even by some members of the Treasury Committee. Inaccuracy of the figures HMRC has about the ‘established debt’ and the reliability of the information HRMC has about the debtor’s accounts are some of the factors that have made the object of public concern. In addition, HMRC will be the one to rule the taxpayer’s possible objections and decide the amount that needs to be left in the accounts for immediate needs. These measures might have negative effects on businesses, as they significantly reduce the cash-flow, thus living them at risk.

This leaves us wondering what will happen next.

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