’Til debt us do part

KEY POINTS

• Can’t pay or won’t pay? HMRC’s new debt management strategy differentiates between them.
• The measures available to allow time to pay.
• Distraint and HMRC’s powers to seize possession of a taxpayer’s chattels.
• Court enforcement proceedings and insolvency.
• The importance of understanding exactly what HMRC can and cannot do.

Readers know that, no matter how profitable, a business cannot survive long without incoming cash-flow. The job of getting the cash in for ‘UK PLC’ falls on the shoulders of HMRC.

This article looks at how the department has revised its tax debt collection strategy, and the methods at its disposal for enforcing payment.

In 2007/08, HMRC received £450 billion in tax and National Insurance contributions from 35 million taxpayers.

However, one-third of taxpayers did not pay on time and the total amount of tax and National Insurance due in that year but outstanding was £17.3 billion.

The task of making sure this amount is collected falls on the HMRC Debt and Banking Directorate (DBD) of which the National Debt Pursuit Unit forms a part; £16.2 billion of tax debt was allocated to DBD for collection in 2007/08 alone. In that year, DBD collected overall a total of £63 billion of outstanding tax debt.

Figures for 2008/09 and 2009/10 tell a broadly similar story. In 2009/10, notwithstanding a fall in total revenue to £435 billion, DBD managed to collect £5.6 billion more of the total tax debt than it did in 2008/09.

New debt-management strategy

One reason for this improved performance is that HMRC have adopted a new and more aggressive debt management and collection policy to safeguard the flow of revenue and reduce the stock of tax debts.

Readers may be aware that HMRC have also recently started sending out aggressive demand letters which have threatened imminent visits from debt collectors or bailiffs and court and insolvency proceedings.

Some letters have apparently stated that if the taxpayer didn’t pay up, the UK would not have enough money to pay the wages of nurses and teachers.

This new approach started in 2009/10. Prior to this, HMRC debt pursuit was effectively standardised across taxpayers, and operated according to a predictable timetable which had an escalation of sanctions as time progressed. There was no attempt to take perceived taxpayer payment behaviour into account in the approach to debt collection.

Under the new system, there is an active attempt to profile taxpayers into those who ‘can’t pay’ and those who ‘won’t pay’.

Those who can’t presently pay, but want to, can be offered assistance (such as time to pay) whereas the ‘won’t pays’ can be immediately targeted with ‘decisive consistent and firm action’. The other main change is that correspondence is not simply designed to remind the taxpayer that the debt is outstanding, but to ‘prompt high levels of immediate payment or inbound phone contact’ (the cynical might say ‘to frighten’).

The first practical step for taxpayers who are having difficulty in paying their liabilities is to ensure that they are being properly categorised by HMRC, as this profiling will determine the options available.

Currently, profiling is done by DBD personnel forming a subjective view as to the reason for non-payment. It is vital to communicate directly with a specific individual (rather than remaining as one of the DBD ‘general’ files, and to make sure that the taxpayer’s genuine good intentions, financial difficulty (and its likelihood of resolution) and are made clear.

If the debt management officer does not have the authority to classify the individual as ‘willing to pay’, the taxpayer should ask for the case to be escalated to a more senior officer.

Business support and time to pay

In November 2008, HMRC introduced the Business Support Service (BSS) which aims to assist taxpayers affected by the credit crisis and recession.

The BSS was extended by the 2009 budget and continues to operate, encouraging taxpayers to make contact with HMRC before tax debts which cannot be paid fall due (and in any event before being contacted about the debt by another HMRC department). The BSS has additional discretion, such as spreading payments over a longer period and waiving late payment penalties and surcharges.

‘Time to pay’ (TTP) is a separate regime and operates under HMRC’s general discretion as to how it collects tax. A TTP request may be made at any stage of proceedings (even if HMRC are in the process of levying distraint; see below).

Broadly, HMRC may postpone payment or accept instalments where the taxpayer can show that:

• it cannot pay the tax on the due date;
• it will be able to pay if spread over a period of time; and
• the offer made is the best that the taxpayer can genuinely make.

A TTP agreement can never be used to reduce the amount of tax due, and HMRC say that only in exceptional circumstances will postponement be for longer than a year. Experience of these regimes appears to be mixed, the main complaint being that it is very difficult to get HMRC to extend an offer.

However, HMRC note that between November 2008 and March 2010 there were 300,000 TTP arrangements valued at £5.2 billion.

From experience, the strongest claims will be from those who have sufficient assets but reduced cash-flow, or those who have no assets but secure cash-flow forecasts. From HMRC’s perspective, the former presents less of an insolvency loss risk, and the latter present a situation where HMRC have ‘nothing to lose’ in delaying.

In other cases, HMRC appear more inclined to pursue collection and avoid the risk of loss through a worsening of the taxpayer’s financial position. When applying for BSS or TTP, taxpayers should bear this in mind, and put forward the strongest possible case to the deciding officer.

Another aspect which appears relevant to HMRC is the threat of adverse publicity. The fear of media disapprobation arising from collection activity which compromises the ongoing viability of taxpayers (particularly small businesses with a number of employees) should not be underestimated, but the likelihood of adverse publicity must be put forcefully for it to have any effect on HMRC’s decision-making process.

Once HMRC are resolved to collect the tax by compulsion, they have a number of methods available:

• distraint;
• court enforcement proceedings; and
• insolvency.

Distraint

This involves HMRC seizing possession (distress or distraint) of the debtor’s chattels and selling them (by public auction) to obtain payment for the debt. The power to distrain for tax debts is granted to HMRC under numerous statutory provisions, of which the most frequently encountered will be TMA 1970, s 61 and the Commissioners for Revenue and Customs Act 2005, s 6 to s 7.

HMRC do not require either a court judgment or the assistance of a bailiff to distrain (although sometimes one is engaged to assist).

Strict procedures must be observed by HMRC in carrying out the distraint otherwise it will be illegal, and damages may be claimed. Prior to distraint, HMRC must issue a demand notice for immediate payment (HMRC operational guidance requires at least seven days’ notice).

For direct taxes, where this notice was not received by the debtor, HMRC should not proceed with the distraint, but should issue another demand notice, and postpone the distraint for a further seven days. In practice, the debtor will have to put forward grounds to raise a genuine doubt.

In VAT cases, HMRC may simply provide the final demand notice on the spot. In any event, the officer must give the debtor a final chance to pay before distraint starts.

Distraint may be levied at the debtor’s personal or business address or, where the business is mobile (such as a decorator), on site.

HMRC do not have any right to enter a debtor’s premises forcibly, unless issued with a warrant to do so by a magistrate. The usual course of action is to enter by invitation (often prior to indicating the precise reason for the visit), or to enter through an open or unlocked door. Once inside, the officer cannot be ejected while in the course of distraint, and may call a constable to assist him if an attempt is made.

Once the distraint is made, HMRC and their third-party agents have a right of re-entry to remove the possessions. Distress for direct taxes may only be commenced between the hours of sunset and sunrise, and never on Sundays or public holidays including Good Friday, Easter Sunday and Christmas Day.

For indirect taxes, distress may be commenced between 8am to 8pm, or during any period when the debtor trades if outside these hours.

Responsible person

HMRC may not levy distraint unless the debtor or a ‘responsible person’ is present. If the debtor is a corporate, this must be an officer of the company. For an individual or partnership, the responsible person must be someone who can confirm ownership of the goods against which the distress is levied.

This will usually be the debtor’s spouse or partner, but only where they know about the debtor’s business and the ownership of the goods. Where the debtor or a responsible person is not present, the officer must postpone the procedure until such time as they are.

The logic behind this is that HMRC may only distrain against goods wholly owned by the debtor. Therefore, the officer must be able to ascertain who owns the goods present. If distress is levied against someone else’s goods, HMRC may be sued by the true owner for wrongful interference. In particular, assets which are loaned or leased to the debtor may not be seized. Assets jointly owned where the debt is sole may not be seized.

The only type of property which may be seized is physical moveable property; however there are further restrictions. Fixtures and fittings cannot be removed, and HMRC should not seize perishables, or furniture and equipment which constitute ‘household necessities’.

Tools of the debtor’s trade should not be seized unless there are no other items available sufficient to cover the debt. The Law of Distress Amendment Act 1908 which further restricts the type of assets against which distress can be levied has been held not to apply to distress for taxes; see MacGregor v Clamp and Son [1914] 1 KB 288.

For VAT purposes, the Distress for Customs and Excise Duties and Other Indirect Taxes Regulations SI 1997 No 1431 lays down a further itemised list of household necessities against which distraint may not be made.

Seizure and removal

Seizure is made by the officer observing the items, and pointing them out to the debtor or responsible person and claiming them as seized. The officer must give the debtor a distraint notice and an inventory of the goods. The goods may then be removed, either by a bailiff or by the auctioneer.

Alternatively, with the debtor’s agreement, they may be left on the premises under what is called a ‘walking possession agreement’. Under this agreement, the legal right to possession of the items passes to HMRC and they can be removed at will.

If the debtor pays during the distraint, the debt will be discharged and the officer is obliged to stop. However, the debtor must actually tender the amount either by cash, cheque, or credit card. HMRC guidance instructs the officer to continue with the distraint and then add the charges to the debt.

It is suggested that if full payment in cleared funds is tendered very early on in the process, proceeding with the distraint is bad administrative practice, and is potentially oppressive conduct.

The debtor is also entitled to make a TTP offer (see above) at any time prior to the completion of the distraint and the officer must give this proper consideration. If this does not seem to be the case, the debtor should contact the National Debt Pursuit Unit directly while the distraint proceeds.

Where the items are removed to the auctioneer’s premises, HMRC must allow at least five days for the debt to be paid before proceeding with the sale; see TMA 1970, s 60(4) and s 60(5) and SI 1997 No 1431, Reg 9.

If any goods have been wrongly seized, (such as leased assets, or those belonging to another) it is now that the relevant paperwork should be produced to HMRC to procure their release.

If the proceeds of the sale are insufficient to discharge the debt, HMRC may attempt another round of distraint, or any of the other remedies set out in this article.

Court enforcement proceedings

In order to claim against assets of the debtor which are not moveables (such as real estate, bank accounts, shares and securities, etc.) HMRC must first obtain a court judgment and then seek execution of that judgement by the charge and forced sale of the debtor’s assets.

HMRC may do this in the Magistrates Court (where the debt is under £2,000 and less than 12 months old), the County Court, or (where the amount exceeds £50,000) in the High Court.

One serious consequence of HMRC obtaining judgment on the debt will be an entry on the statutory Register of Judgments, Orders and Fines. Unless the order is satisfied in full within one month, the judgment (and therefore the debt) will remain on the register and be visible for six years.

This has significant and long-term consequences for the credit record of the debtor, and this sanction is a significant stick in the hand of any creditor seeking to obtain payment.

Pre-action conduct practice

Prior to bringing court proceedings, HMRC are obliged to comply with the pre-action conduct practice direction in the Civil Procedure Rules. Perhaps the most important aspects of the protocol in these circumstances are:

• the requirement for the claimant to send a letter (a ‘letter before claim’) setting out the full details of the claim; and
• to allow the debtor sufficient time to take legal advice if requested.

The protocol suggests that even in the simplest case, the debtor should be given at least 14 days to obtain the professional advice, with an additional period to take stock and contact HMRC.

If this hiatus is asked for and not permitted, HMRC may be liable for sanctions under the protocol, including the staying of the claim (effectively, its freezing until the debtor has time to take advice), an order for HMRC to pay the legal costs of bringing the claim, and/or the deprivation of interest on the judgment debt.

Threats to bring proceedings imminently should be dealt with by reminding HMRC of the relevant paragraphs of the protocol and the sanctions for non-compliance. If the officer dealing with the case does not have authority to hold off issuing proceedings, then the matter should be escalated to a higher officer.

It is not uncommon for lower-level officers to admit that they are ‘working from a script’ and have absolutely no discretion to vary the timing of proceedings.

Insolvency

The ‘weapon of mass destruction’ in HMRC’s arsenal, however, is to commence insolvency proceedings against the debtor (bankruptcy in the case of an individual and compulsory winding up in the case of a company or partnership). The requirements for individuals and companies are slightly different.

HMRC may petition the court to wind up a company as insolvent where:

• HMRC have served on the debtor a ‘statutory demand’ for the payment of a debt worth more than £750, and that demand has not been paid, secured, or compounded (i.e. a repayment agreement entered into by the debtor and HMRC) within three weeks of service;
• HMRC have obtained a judgment against the debtor, and having attempted to enforce the judgment, it has been returned unpaid;
• the court is satisfied that the company is unable to pay its debts as they fall due; or
• the court is satisfied that the value of the company’s debts exceeds the vale of its assets.

For an individual, the court may accept HMRC’s bankruptcy petition where:

• the amount of a debt immediately due and payable exceeds £750;
• the debt is unsecured; and
• a statutory demand has been served on the debtor for payment of the debt, which after three weeks has not been paid, secured or compounded (or alternatively a judgment order has been executed and returned unpaid).

There is another route where HMRC may petition for a winding up for a debt not presently due where there appears to be no reasonable prospect of satisfying the debt.

Dealing with the threat of insolvency

The insolvency threshold is not high and HMRC can legitimately threaten a petition for all but the smallest tax debts.

However, even if a statutory demand is served, the debtor still has 21 days to pay, secure or compromise the debt before the court will hear the petition. In that period, HMRC are obliged to properly consider TTP requests.

HMRC operational guidance advises against taking security in all but exceptional circumstances. In the case of individuals, this is presumably because the useful threat of insolvency proceedings is greatly diluted; the route to recovery then being by appointment of a receiver to sell the asset against which the debt is secured.

HMRC guidance is to direct the debtor to try and raise funds from a loan secured on the asset offered as security.

In the current lending market, this approach is highly unrealistic as mainstream banks have largely withdrawn from the bridging loan market, and for individuals (even where significant assets are available) it is now next to impossible to borrow on the basis of free equity as mortgage guidelines currently restrict total borrowing to multiples of established income.

The best approach in such a situation is perhaps to try and negotiate a TTP agreement on the basis of the future sale of the relevant assets. From a practical perspective, if a taxpayer is served with a statutory demand, correspondence with HMRC should be in writing, not withstanding the natural desire to use the expedience of the telephone.

This documentation may be useful in trying to persuade the court of a realistic prospect of satisfying the debt, and granting a temporary adjournment.

HMRC should also be reminded that insolvency is not a collection method, but must only be used to protect the crown’s tax debt when there is a real risk of loss (HMRC operational guidance notes that taxpayers with apparently no ability to pay often produce the funds just prior to the court hearing).

Furthermore, insolvency should not be used to punish taxpayers.

In any event, advice should be sought immediately from a practitioner experienced in dealing with insolvency, HMRC and tax debts, the consequences of insolvency being extremely difficult to undo at a later date.

Conclusion

Few practitioners will have a client portfolio that escapes the attention of HMRC’s Debt and Banking Directorate and the National Debt Pursuit Unit.

When HMRC do make such contact, it is important to understand the department’s powers and the taxpayer’s lines of defence and the options that are available to them. Don’t let the client’s debt part you from the ability to continue to give advice at what will undoubtedly be a difficult and testing time.

Joseph H Howard MA (Cantab) LLM (Tax) is a barrister at Atlas Chambers. He advises and litigates in respect of all aspects of UK direct and indirect taxation, including personal and corporate tax planning. Joseph can be contacted by email or by telephone: 020 7629 7980

Issue: 4308 / Categories: Comment & Analysis , debt collection , Admin