Call for evidence outcome

Modernising tax debt collection from non-paying businesses – summary of responses

Updated 27 April 2023

1. Introduction

The overwhelming majority of people and businesses in the UK pay the right tax at the right time, providing funding for our vital public services. HMRC’s debt management function plays an important role when a tax liability becomes overdue for payment and becomes a debt (if it is not under appeal), both in terms of the significant support it provides to taxpayers in temporary financial difficulty, and the fair and balanced approach it takes to debt collection.

HMRC takes an understanding and supportive approach when dealing with businesses and individuals in temporary financial difficulty who need some support from HMRC to get back onto a sustainable financial footing. In all cases, the department wants to work with taxpayers to find a way for them to pay off their tax debt in an affordable way for them as quickly as possible. Where taxpayers are facing difficulty in making a tax payment, HMRC can agree a Time to Pay (TTP) instalment arrangement. HMRC typically has more than half a million arrangements in place at any one time, and 9 out of 10 of them complete successfully.

However, it is HMRC’s responsibility to collect any tax debts in an efficient, economical and timely way, ensuring fairness for taxpayers and protecting funding for vital public services.

In order to explore this area, HMRC published the ‘Modernising Tax Debt Collection from Non-Paying Businesses Call for Evidence (CfE)’ on 30 November 2021, to engage with external stakeholders early in the policy development, to gather evidence and test our initial thinking.

The aim of this CfE was to ensure HMRC’s approach to collecting tax debt is fit for a modern tax system and remains fair and effective to all taxpayers in light of the changing nature of business. This CfE sought views on HMRC’s approach to the small minority of taxpayers who do not engage with HMRC and hold off paying for as long as they can. This could be a regular occurrence or singular instance of a business refusing to pay despite having the ability to do so.

Chapter 2 of the CfE set out the changing nature of the economy where an increased use of e-commerce has given rise to new business practices. This creates a new challenge for HMRC to collect taxes owed from businesses who set up their affairs in less traditional ways, and includes those who conduct their business in the UK without having a presence or physical assets here. The CfE looks at HMRC’s existing powers, including Taking Control of Goods (TCoG), to seek views on the extent to which it is a problem that these powers cannot be used when dealing with certain business practices.

Chapter 3 of the CfE sought views on the small minority of businesses with tax liabilities who, while able, deliberately choose not to pay their tax debt. HMRC wants to explore ways to encourage these businesses to change their behaviour, for example, whether guarantees and types of pre-payment could be more widely used to tackle deliberate non-payment. Any new powers introduced would be used in a very limited way to tackle this small minority of businesses and would not affect any taxpayers in financial difficulty.

The CfE invited comment on 2 main questions for each proposal:

1. To what extent do you think this proposal is a problem that needs addressing? 
2. Should HMRC modernise its powers to address this problem?

HMRC is grateful to those stakeholders who contributed to this discussion. We received 13 written responses. A breakdown of the respondents is as follows:

• 1 Individual
• 5 Accountancy Membership Bodies
• 2 Tax Charities
• 3 Financial Advisors
• 1 Banking and Finance Industry
• 1 Business

One of these responses was outside of the scope of the CfE. This respondent replied with suggestions on specific improvements in certain areas of debt management, which will be considered outside of this consultation process.

Chapter 2 of this document sets out the questions posed in the CfE, summarises what respondents told us and provides a government response. Chapter 3 of this document provides more detail on the next steps and how HMRC plans to take this work forward.

The Annex contains a list of all respondents, excluding individuals, who provided a written response.

2. Responses

Lack of assets in UK principal place of business

One consequence of the increase in e-commerce is the rise in warehouse usage. Some retailers use fulfilment warehouses that belong to a third party to store and ship their goods. HMRC only seizes assets on premises where a business is carrying out a trade. HMRC does not have the power to enter a business premise if this is not the premise where they carry out a trade or business, such as a fulfilment centre or third party warehouse.

Question 1: To what extent do businesses not hold any UK assets at their principal place of business, and do you think this will increase?

Question 2: What are your views on whether and how HMRC should modernise to adapt to the increase in businesses who do not hold any UK assets, in order to minimise non-payment of tax debts?

Stakeholder Response

There was general agreement that the use of third–party premises would increase. Internet-based businesses are growing in the UK and traditional businesses are also increasingly trading online and will hold stock in facilities other than where they carry out their business. One response noted that the pandemic led to changes in business practices and reduced office working, resulting in fewer assets being held at the business premises. Small businesses sometimes use, for example, their accountant’s address as their business address, however, would not hold any assets there.

HMRC’s recently introduced Fulfilment House Due Diligence Scheme was referenced as a relevant successful case study. The scheme requires the UK fulfilment house to carry out due diligence on the businesses storing assets in their premises and ensures that fulfilment houses play their part in reducing abuse of VAT rules by online traders based outside the EU.

There was also general recognition that it is appropriate for HMRC to modernise its TCoG powers, but it was noted that HMRC should develop a stronger evidence base to support extending TCoG to address this issue.

One respondent mentioned the legal barriers HMRC may encounter if given power to seize goods held at third-party premises, such as obtaining access, proving ownership of specific goods and taxpayer confidentiality.

One respondent was very supportive of TCoG, especially for those evading payment.

Comments included:

“We are cautiously in favour of HMRC modernising their approach in this area, subject to appropriate procedures, controls and safeguards.”

“With an increasing number of businesses carrying out significant and in some cases their core business away from what would traditionally be considered their principal place of business, it makes sense for HMRC’s powers to be widened to cover UK premises owned or leased by the business other than those that meet that definition.”

“Reflecting these changes in business practice, in principle, it is appropriate that HMRC should modernise and adapt its practices to minimise non-payment of tax debts.”

Government Response

The majority of the respondents consider this is an increasing trend and that HMRC should modernise to adapt to the increase in businesses who do not hold any UK assets. Based on the responses received, the government considers that this proposal should be developed further.

We will consider the issues raised in relation to practically implementing this proposal in a future consultation which will include exploring how legislation could be amended.

We will also keep up with developments in the other areas identified that may be related to this proposal (such as the fulfilment house due diligence scheme) but are aware that these are mainly aimed at VAT – the government’s proposals will encompass all tax debts.

More specifically, the Fulfilment House Due Diligence Scheme may help us develop this further due to access to fulfilment warehouse information on goods stored – but again, this will only be relevant to non-UK residents and VAT specific.

Leased assets

In-house leasing occurs where an associated company owns and leases assets. There can be commercial reasons for keeping the main business and the associated leasing company separate. However, this can also be used to avoid civil recovery action against debts owed by the main business, because the assets are placed with this associated, but separate, special purpose vehicle. Ultimately, it is likely to be larger businesses that are able to do this, creating unfairness given this practice restricts HMRC’s ability to collect tax debts.

Question 3: To what extent do businesses make use of in-house leasing, is it more popular in certain industries/sectors than others and do you think this model will increase?

Question 4: What are your views on whether and how HMRC should modernise to adapt to the use of in-house leasing, in order to minimise non-payment of tax debts?

Stakeholder Response

The general view of respondents was that they did not have evidence that this was an increasing model. If there is evidence that this is popular in certain industries and that it will increase and is used to prevent HMRC taking action, then we should consult but it is essential that data gathering take place first.

One respondent raised the point that large businesses are already subject to additional scrutiny which would mean the behaviour we are trying to address would be unlikely.

One respondent suggested that where the lessee and lessor are companies in the same group, or owned by the same ultimate individual owners, there might be a way to make those owners liable for the debts of the lessee company. However, the recommendation was that HMRC should look to recover assets actually owned by the lessee in the first instance.

Concern was also raised by one respondent that the lessee’s business activities could be detrimentally affected if HMRC seized the asset.

Comments included:

“If there is evidence that the use of in-house leasing is a model that is popular in certain industries/or that it will increase, and that it is used by some businesses to prevent HMRC taking civil recovery action on the assets, then we agree that HMRC should consult on how it might modernise to adapt to this in terms of minimising non-payment of tax debt.”

Government Response

The government will carry out data gathering to inform whether to pursue this proposal. If the data gathering exercise shows evidence that the use of in-house leasing is a model used by some businesses to prevent HMRC taking civil recovery action, we will also consider the issues raised in relation to practically implementing this proposal in a future consultation which will include exploring how legislation could be amended.

Intangible assets

Intangible assets are non-monetary assets that are not physical in nature (as opposed to tangible assets like land and vehicles), and are protected through the exercise of legal or custody rights. Types of intangible assets include, but are not limited to, patents, trademarks, copyright and domain names. The use of TCoG powers is restricted to tangible assets, and therefore cannot be used to incentivise payment where a business primarily has intangible assets.

Question 5: To what extent do businesses make use of intangible assets, and do you think this will increase?

Question 6: What are your views on whether and how HMRC should modernise to adapt to an increased use of intangible assets, in order to minimise non-payment of tax debts?

Stakeholder Response

The general consensus was that it is anticipated that businesses will increasingly make more use of intangible assets. If evidence agreed with this view, then the government should consult further.

A recent report from McKinsey was mentioned, which highlighted how investment has shifted to intangible assets in USA and Europe over the past 25 years, with particular acceleration during the pandemic. One respondent stated that not being able to use TCoG in these situations is outdated.

One respondent was in support of the principle, however, measures that weaken or reorder the priority of security will have a deterrent effect on lending. The impact of any such changes on businesses that are heavily reliant on intangible assets in order to access external finance will likely be significant.

Many of the respondents highlighted the practical difficulties in implementing the use of TCoG to take control of intangible assets. Difficulties such as how to value an asset that is separated from the business (such as its domain name) and the location of the server where the asset was held, could affect HMRC’s ability to control and sell the asset. It could also encourage businesses to locate outside of the UK if HMRC could not obtain control of assets on overseas servers.

One respondent suggested a couple of ways to address the issue of how to value an asset – that HMRC could obtain a claim over assets so that HMRC would be entitled to a share of the proceeds if assets are sold, or to take part ownership and charge royalties to the business.

Comments included:

“Intangible assets (such as domain names, websites, goodwill and customer lists) are used by businesses. It is likely that this will increase in the future, particularly with an ever-increasing move to wholly online based business, who would likely not hold many tangible assets and instead have their value in intangible assets.”

“It is difficult to see how HMRC could take ownership of intangible assets owned by the business without stripping the value out of that asset once it has been decoupled from the business unless, for example, the asset is sold to a competitor that could use the intangible in its own business.”

Government Response

Based on the responses received, the government considers that this proposal should be developed further but due to issues raised in relation to practically implementing this proposal, it will not be a priority for an initial consultation.

Digital Wallets

Digital wallets or ‘e-wallets’ are an electronic version of a physical wallet. They are an online service which is not a bank account and allow an individual to make transactions. The Direct Recovery of Debts (DRD) legislation does not extend to digital wallets. This means HMRC currently has no enforcement powers to recover tax debts if a business has substantial funds in a digital wallet but is refusing to pay.

Question 7: To what extent do businesses use digital wallets, and do you think this will increase?

Question 8: What are your views on whether and how HMRC should modernise to adapt to an increased use of digital wallets, in order to minimise non-payment of tax debts?

Stakeholder Response

All those that responded to these questions agreed that the use of digital wallets will increase. It was considered inevitable by one respondent, that business usage will increase given digital wallets have overtaken debit card as a means of online payment. As it is used most commonly by businesses that trade on digital platforms such as Amazon and eBay, these businesses are only likely to get more numerous the more businesses operate online. In addition, if further regulation is brought in around digital currencies, it may be that cryptocurrency wallets may become a more popular method of paying for goods and services.

Those that responded agreed that DRD should be extended to cover digital wallets. As HMRC can use DRD on bank accounts, as a matter of fairness, it should extend to digital wallets.

However, the current safeguards would need to be reviewed in relation to digital wallets. Respondents were satisfied that DRD is currently used in a controlled way and would want the same reasonable approach to be adopted should the power be extended.

The effectiveness and practical application of expanding DRD to digital wallets was queried. The value of funds in digital wallets is likely to be lower than savings in bank and building society accounts. Is there any evidence that DRD would currently have been used to take funds from digital wallets because maybe the bank did not have the funds but digital wallets did? How easy would it be for HMRC to access digital wallets? Do digital wallet operators have the same levels of due diligence and oversight of their customers as banks do for example?

Some respondents suggested the government should also consider cryptocurrency wallets but it was unclear how easy this would be due to the fluctuating value of cryptocurrency.

Comments included:

“In principle we cannot see any objection to extending the DRD regime to cover digital wallets – not least to prevent the non-compliant trying to use digital wallets to ensure that HMRC cannot use DRD. However, as the call for evidence notes in paragraph 3.5, it is important that taxpayers are confident that HMRC’s powers are used reasonably, in order to maintain and build trust in the tax system.”

“Given HMRC has had the power to recover established debts directly from debtors’ bank and building society accounts for 7 years, as a matter of principle, equity and fairness it makes absolute sense that HMRC should modernise their approach so that the same power exists in relation to digital wallets.”

Government Response

The government is pleased that the feedback on the use of DRD is positive and that respondents were satisfied that DRD is used in a controlled way.

Based on the responses received, the government considers that this proposal should be developed further. This will include consultation with external stakeholders (digital wallet operators) to ascertain appetite and identify any potential barriers to implementation.

We will consider the issues raised in relation to practically implementing this proposal in a future consultation and ensure that safeguards are taken into account in any policy development going forward.

Improving the collection of business tax debt from non-paying businesses

There will still be a small minority of businesses who will not change their behaviour despite the threat of earlier enforcement. HMRC is seeking stakeholder views on what more can be done to target these businesses, including whether some of the department’s existing powers, which are currently only used to tackle tax avoidance and evasion, could be extended in a specific and limited way to support tax debt enforcement work.

Question 9: Do you have any views on how often businesses who can pay their tax debt repeatedly choose not to, and whether HMRC should take steps to tackle this issue?

Stakeholder Response

It was generally accepted that this was a challenging cohort of customers to tackle. However, concern was raised as to how HMRC would be able to accurately identify customers who are deliberately not paying as opposed to those who are in genuine financial difficulty. There could be other reasons for non-engagement. It was advised to proceed with caution and awareness that there may be underlying issues as to why a customer has not engaged with HMRC.

The other main thread of the responses was that HMRC needs to provide further evidence that this is a problem that needs tackling. Unless evidence suggests otherwise, HMRC should use its existing powers more fully rather than extending powers to address this particular group of customers.

Government Response

The pandemic led HMRC to accelerate their implementation of a data driven approach to tackling tax debts. HMRC currently tailors their communications to a customer’s financial circumstances. This work continues to evolve and HMRC are using data to focus not only on a customer’s financial circumstances and their ability to pay, but also their likelihood of paying, allowing even more tailored journeys, for example, shortened journeys for customers with a history of repeat non-payment. This work is constantly developing and will enable HMRC to accurately identify those customers who are deliberate, repeated non-payers.

As this work is still in development, the government are unable to publish statistics but should be in a better position to provide further updates when a further consultation is published.

Security deposits

HMRC has the power to require high-risk businesses to provide an upfront security deposit, where it believes that there is a serious risk of non-payment. HMRC holds the security deposit while monitoring the tax affairs of business and will return it when it considers there is no longer a risk that the business will fail to pay their debts. This regime can currently only be used in cases where there is serious non-compliance with reporting the correct tax liability due to avoidance and evasion of tax and not in cases where a business simply does not engage with HMRC, and regularly delays paying or does not pay despite having the ability to do so.

Question 10: To what extent do you think expanding security deposits to include repeated, intentional non-payment would incentivise businesses to pay their future tax liabilities on time?

Stakeholder Response

There was general agreement that this may have some impact but some suggested piloting first to see if it would be useful in changing behaviour.

There were similar concerns raised as to question 9 above – how would deliberate non-payment be identified? It would be beneficial to see data on the size of the problem before commenting on how to tackle it. A full consultation should include additional data on an estimate of the scale of the problem.

If security deposits is extended to non-payment, robust safeguards should be in place to ensure repeated non-payment was intentional and should include clear, objective criteria for determining what type of behaviour was in scope.

The government should also consider what threshold should be used in determining what constitutes repeated non-payment. It was expected that HMRC would only use this power against a business of sufficient size to be able to raise a deposit without hampering trade. The expansion of the security deposit regime in this way could potentially affect liquidity and present cashflow issues for some businesses.

One suggestion was that HMRC should commission independent research into our current approach to security deposits and the effect the demands for a deposit have on struggling businesses.

One respondent commented that it was reassuring that the power was not used excessively currently.

One respondent suggested that any extension of security deposits should be considered alongside the withdrawal of HMRC’s status as a preferential creditor in formal insolvency cases.

One final comment was around awareness. The view expressed was that taxpayers were generally unaware of HMRC’s powers. In order for this to work, the government should publicise more widely how it uses the powers available.

Comments included:

“To request security deposits in these circumstances means that it would be necessary to identify businesses who repeatedly and intentionally withhold payment and this would seem to be quite a difficult task. HMRC will need to think about how they will identify these businesses in the first instance. It is not clear how much the security deposit would be, but for smaller businesses, having to use funds for a security deposit might be depriving them of working capital which they need to generate revenue to pay their future tax bills.”

Government Response

Based on the responses received, the government considers that this proposal should be developed further.

The government’s response to question 9 highlights how HMRC will identify those customers whose behaviour will be in scope of this proposal.

The government is pleased that respondents were reassured in the current use of the power which illustrates how the issuing of security warning letters and security notices provides the threat of potential prosecution and therefore results in a high percentage of behavioural change. We will further monitor the success of security deposits whilst working on this consultation ^{[footnote 1]}.

Any further consultation will include additional data on the estimate of the scale of the problem and will consider thresholds for application and what objective criteria can be applied in determining whether certain behaviour is in scope. It will also include discussion on what safeguards would be appropriate.

There is no intention to review legislation introduced in Finance Bill 2020 that made HMRC a secondary preferential creditor in respect of certain tax debts as part of considering extending security deposits to non-paying businesses. The extension of the security deposit regime to businesses that repeatedly do not pay their tax whilst having the ability to do so is addressing an issue separate to the order of priority in an insolvency.

Director’s personal guarantee

A director’s personal guarantee is a pledge made by a director to repay money on behalf of the company. This is often required if a company needs a business loan or to secure business needs such as ordering stock. HMRC is interested in exploring whether personal guarantees could be used to encourage companies to pay their tax on time where they have a history of non-payment despite having the ability to do so.

Question 11: To what extent do you think using director’s personal guarantees for businesses with a history of repeated, intentional non-payment would incentivise businesses to pay their tax debt?

Stakeholder Response

The general consensus was that this could result in considerable behaviour change given the concentration of the mind that personal liability would bring compared to business liability.

However, concern was raised as to how likely it would be that the Director would be able to provide enough assets for some businesses. A business can incur more in tax debt than a director may have in assets, thus limiting HMRC’s ability to recoup what is owed.

Some respondents also raised the concern that directors may move assets elsewhere, such as with partner/family or transfer offshore.

Again, similar to responses on security deposits, it was highlighted that any new power should be only used where there is no doubt that non-payment was deliberate (how would HMRC identify these) and to consider what the threshold would be for ‘repeated’ non-payment. The importance of proportionate safeguards was also raised.

Respondents also commented that it would be good to have data on the size of the problem before deciding whether introducing this power would be worthwhile. Any further consultation should contain additional data on HMRC’s estimate of the scale of the problem.

Comments included:

“Were HMRC to expand the scope of using director’s personal guarantees for businesses, robust safeguarding must be in place to ensure this power is only used where there is no doubt that non-payment is intentional.”

Government Response

Based on the responses received, the government considers that this proposal should be developed further but this will not be a priority for an initial consultation. This will allow the government to monitor the success of the recently introduced joint and several liability powers on individuals.

The government’s response to question 9 highlights how HMRC will identify those customers whose behaviour will be in scope of this proposal.

Any further consultation will include additional data on the estimate of the scale of the problem and will consider thresholds for application and what objective criteria can be applied in determining whether certain behaviour is in scope. It will also include discussion on what safeguards would be appropriate.

Role of agents

HMRC seeks to work constructively with agents as set out in the policy paper ‘HMRC Approach to Working with Agents’. A significant number of businesses engage the services of agents to provide advice, complete tax returns and interact with HMRC on their behalf. Many agents however do not get involved in whether their client actually pays what they owe after an agent submits a return.

Question 12: What opportunities are there for agents and intermediaries to play a greater role in helping their clients engage with, and pay tax due, to HMRC?

Stakeholder Response

A number of suggestions were received as to how agents could play a greater role in helping their clients pay tax due to HMRC These mainly relied on improvements to HMRC’s systems such as receiving an automatic notification when a client’s tax has been paid or is overdue. Making professional body membership a requirement for agents was also suggested.

The majority of those that responded reiterated that this already happens to some extent in that agents will advise their clients when a tax is due and the implications for non-compliance and late payment. However, they would not be aware if their client had not paid their tax on time, nor would they always assist clients with TTP discussions as this would incur a fee to the agent which would add to the client’s indebtedness when already struggling to pay.

Some respondents requested statistics we may have on what proportion of non-paying businesses have a tax agent for the tax they owe to HMRC.

One advisory body stated that some members fed back that there is still a fear of dealing with HMRC amongst many taxpayers – what may appear to be deliberate non-payment could be financial hardship.

Comments included:

“Agents already play a vital role in assisting taxpayers and businesses with meeting their compliance obligations under UK tax legislation. This includes advising taxpayers of not just filing deadlines but also when tax payments are due to crystallise whilst also highlighting the implications of non-compliance and late payment.”

“To require an agent to become directly involved in the collection of outstanding tax debt could damage the independent relationship an agent has with HMRC when acting on behalf of their client. This could lead to irrecoverable costs and, ultimately, lost clients.”

Government Response

The government were pleased to receive so many suggestions on how HMRC could make it easier for agents to help their clients pay their tax due to HMRC and will liaise more widely within the department to assess whether any suggestions provided are already in development and what proposals could be developed further.

As part of this work, the government will ascertain whether any statistics could be produced on the number of non-paying businesses that have a tax agent for the tax they owe to HMRC.

The government was disappointed to see the feedback that there is still a fear of dealing with HMRC. At all times, we take a supportive approach to those who have tax debts or are concerned about their ability to pay their tax. We do everything we can to help customers with short-term difficulties. We urge these customers to contact us for support if they are in financial difficulty so we can work together to get customers the support they need.

3. Next steps

Having considered the responses to this CfE, the government now plans to further investigate the approach to modernising HMRC’s powers in this area.

The government will focus an initial consultation on the following 4 proposals:

• extending TCoG to those with no UK assets, or assets at a principal place of business
• extending TCoG to in-house leasing
• extending Direct Recovery of Debt to Digital Wallets
• security deposits to recurring non-paying businesses

Before we consult on these 4 proposals, HMRC will develop an evidence base around the scale of the problem of serial non-payers – this analysis will be enhanced by HMRC’s segmentation analytics. Included in this work, which will be conducted over the coming year, will be an assessment of the current legal barriers to introducing these new powers.

The remaining 2 proposals (extending TCoG to intangible assets and extending Directors Personal Guarantees) require careful consideration and stakeholder engagement around how they could be implemented in the best possible way. Specifically, on extending Directors Personal Guarantees, HMRC would benefit from monitoring and evaluating the recently introduced joint and several liability powers on individuals.

Following further evaluation, engagement, and analysis on these 6 proposals, the government will take a view on the best time to consult.

Annex: List of stakeholders consulted

• Association of Accounting Technicians
• Chartered Institute of Taxation
• Teneo
• BCO LLP
• Low Incomes Tax Reform Group
• Institute of Chartered Accountants in England & Wales
• Institute of Chartered Accountants Ireland
• Institute of Chartered Accountants Scotland
• Grant Thornton UK LLP
• UK Finance
• Institute of Financial Accountants
• Marston Holdings

1. Correction in relation to statistics published: In 2018/19, HMRC considered security interventions in 478 cases but issued 202 notices, not 9 as stated. ↩