What directors need to know about the resumption

In a significant move further signalling their ongoing determination to tackle outstanding tax arrears, HMRC has confirmed the restart of their Direct Recovery of Debts (DRD) powers. 

This policy, which allows HMRC to recover outstanding tax directly from bank accounts, was paused during the Covid-19 pandemic. Now it’s back in a “test and learn” phase but for directors and business owners with tax debts it’s not a theoretical threat – it’s an active enforcement measure. 

What is Direct Recovery of Debts?

DRD grants HMRC the power to require a bank or building society to pay sums owed directly from an account or a cash Individual Savings Account (ISA). This power applies not only to individuals but to businesses who owe HMRC £1,000 or more. 

The underlying philosophy of DRD is strictly focused on debtors who HMRC deem “can pay, won’t pay”. Those that have sufficient means to settle their debts but are deliberately delaying repayment or actively choosing not to pay. It’s intended for use only after all other conventional recovery methods have been exhausted.

Serious implications for directors

If your business, or you personally, owe HMRC tax arrears then the potential impact of DRD could be great. 

HMRC estimates that a significant proportion of those owing more than £1,000 have substantial funds available: 73% have over £10,000 and 48% have over £20,000 in their accounts and ISAs.

Safeguards will be in place

While DRD is seen as an invasive tool, it’s subject to stringent safeguards designed to ensure fair treatment and avoid undue hardship. Directors should understand these processes as they represent the last opportunity to object or negotiate.

  • Repeated non-engagement – DRD will only be applied where debts are established, when the timetable for appeals has passed and the debtor has repeatedly ignored HMRC’s attempts to make contact. 
  • Guaranteed face-to-face visit – HMRC guarantees that every debtor considered for DRD will receive a face-to-face visit from HMRC agents prior to recovery action. The meeting will serve several key purposes:-
    • Confirmation of the identity of the taxpayer and validating the debt
    • Providing an opportunity to discuss options to resolve the debt, including offering a Time to Pay payment plan 
    • Assessing whether the taxpayer is in a vulnerable position and requires additional support.
  • Minimum funds protection: HMRC is committed to always leaving a minimum of £5,000 across the debtor’s accounts. This safeguard is intended to protect funds needed for essential commitments such as wages, mortgages or essential business and household expenses.
  • Objection and appeal – Once the DRD recovery process has been initiated (including a hold placed on funds), the debtor has a 30-day window to lodge an objection with HMRC. No funds will be transferred until this period has passed and the objection has been decided upon. Debtors also retain the right to appeal HMRC’s decision to a county court on specified grounds, including hardship.

The power of deterrence

HMRC believes that the true effectiveness of DRD lies not in the number of times funds are actually seized but in its strong deterrent effect.

During its initial operational period (From April 2016 to December 2018), HMRC made just 19 deductions, recovering £361,678 through direct action. However, during that same period, the threat of DRD contributed to the collection of £178 million of outstanding tax debt. 

The majority of this revenue was collected after HMRC started the DRD process but before the mandatory face-to-face visit. This evidence confirms that the policy had met its objectives by ensuring that the government was paid what it is lawfully owed.

If your business is behind on its repayments to HMRC then don’t wait for an uncomfortable face-to-face visit – get some impartial, professional advice right now. 

We offer a free, initial consultation to any director who wants to better understand their options including Time to Pay arrangements or other options to allow a company to restructure efficiently and effectively including CVAs and administration.

Get in touch today to deal with any outstanding worries before they become actual problems.