Corporate report

Review of the direct debt recovery intervention

Published 16 April 2019

1. Summary

Direct Recovery of Debts (DRD) came into effect in November 2015 and gives HM Revenue and Customs (HMRC) the power to recover established debts directly from debtors’ bank and building society accounts. The intervention targets those debtors who can and should pay, but have repeatedly refused to do so. The measure therefore helps HMRC achieve its objective of maximising collection of legally due tax revenue essential to the proper funding of vital public services, while ensuring a fair and level playing field for the vast majority of taxpayers who pay their taxes in full and on time.

When announced at Budget 2014, ministers agreed HMRC would provide Parliament with a full review of DRD after the policy had been operational for two years. This report delivers that commitment by reviewing DRD activity from April 2016 until December 2018.

This report considers whether the key policy objectives - reducing tax debt owed by securing payment in full, ensuring a fairer tax system and providing better value for money - have been achieved through focusing on the following elements:

• effectiveness in collecting tax debt
• impact on debtors, including vulnerable taxpayers

HMRC is committed to identifying vulnerable customers and providing those customers with the extra support they need to manage their tax affairs. Such customers, once identified, are excluded from the DRD process.

In summary, the intervention has achieved its policy objectives and has contributed towards collecting £178 million of tax revenue. The low volume of complaints, objections and appeals, the low number of those upheld, and the identification of vulnerable customers, confirms that the correct debtors are being identified.

2. Introduction

The Direct Recovery of Debts (DRD) measure came into effect on 18 November 2015 under Schedule 8 of the Finance (No.2) Act 2015. This new legislation gave HMRC the administrative power to secure payment of tax debt directly from the debtor’s bank and building society accounts under certain conditions.

The measure is aimed at those debtors who have repeatedly ignored attempts by HMRC to collect tax debts owed, despite having the means to pay.

This report fulfils HMRC’s commitment to Parliament to conduct an internal review of the intervention following two years of implementation.

Although the measure was introduced into legislation in November 2015, it was not fully implemented into HMRC’s operational process until the end of March 2016. This was to allow HMRC time to work with delivery partners, such as banks and building societies, to develop and agree operational processes around how any outstanding tax debts owed by debtors would be collected.

The report reviews DRD recovery action completed between April 2016 and December 2018.

3. Background

The DRD enforcement measure contributes to HMRC’s objective to recover tax debt owed in the most effective way possible, whilst ensuring fairness to all customers and appropriate safeguards are in place, by:

• ensuring more money owed to Government is paid in full to fund vital UK public services
• contributing towards a fairer tax system by ensuring the minority of individuals and businesses who do not pay their taxes on time do not gain an unfair advantage over the majority who do pay on time
• providing better value for money for the majority of compliant and responsible taxpayers, by recovering more debts in the most cost-effective manner

Legislative requirements were specified to ensure that debtors did not suffer any undue hardship. These were:

• only taking action against those who have finalised tax debts
• only using DRD to recover money from those debtors with tax and/or tax credits debts of more than £1,000
• leaving a minimum of £5,000 in the debtor’s accounts
• only taking DRD action when the timetable for appeals has passed
• a debtor can object directly to HMRC and, if they do not agree with HMRC’s decision following their objection/appeal, to a County Court

In addition, other non-legislative safeguards were introduced to protect vulnerable customers and ensure appropriate debtors were being targeted for DRD action. This included:

• ensuring that every debtor would receive a face-to-face visit from an HMRC agent before any DRD recovery action began - this is an opportunity for HMRC to personally identify the taxpayer and confirm it is their debt, explain what they owe and discuss payment
• where a debtor meets the DRD criteria but is considered vulnerable, or in need of extra support following the face-to-face visit, DRD will not be used and the debtor may be offered help through a specialist team

4. DRD operational process

Before consideration of DRD action, a customer will have first received a request for payment of their liability, and then received multiple letters and attempted calls from HMRC seeking payment.

The DRD process is set out below, including the steps at the pre-DRD stage through to formal recovery action.

1 - Internal assessment for DRD suitability

A debtor will only be considered appropriate for DRD action where they would have an estimated deposit of £5,000 left in their account after any payment is deducted.

2 - Initial contact (telephone, letter)

Where HMRC is able to make contact with the debtor and secure payment of outstanding tax debt, DRD action ceases.

3 - Face to face visit by HMRC Agent

If no payment is secured, the debtor receives a visit. This will include the Agent completing an assessment of vulnerability. If the customer is deemed to be vulnerable at this stage, DRD action ceases.

4 - Information Notice issued (start of formal DRD process)

If suitable, a request is sent to the debtor’s bank seeking confirmation of available deposits. If under £5,000 then DRD action ceases.

5 - Hold Notice issued

If suitable, debtor is notified of hold on their account. At this stage the debtor can lodge an objection to HMRC within a certain timeframe. The debtor may also apply to the Court to appeal HMRC’s decision if their objection was not upheld.

6 - Deduction Notice issued

Debtor notified of intention to deduct payment.

7 - Payment deducted from bank account

If after 30 days, no objection or appeal has been made, the tax debt payment due will be taken from the account. If an objection is raised, payment deduction is made 30 days after HMRC response or following court finding for HMRC in an appeal case.

5. Aims of the review

The overall aim of the review is to understand and assess the effectiveness of the DRD intervention since its introduction. The review seeks to establish whether the key policy objectives have been met, with focus on the following elements:

• effectiveness of intervention in collecting tax debt payments
• impact on debtors targeted by DRD action, including supporting vulnerable customer

6. Effectiveness of intervention in collecting tax debt payments

A smaller customer group was initially targeted to allow HMRC to gain experience. The measure was therefore not fully operational until the end of March 2016.

Since that date, in total £178 million of outstanding tax debt has been successfully collected. The vast majority was collected before the face-to-face visit by the HMRC Agent, but after other attempts at recovery by HMRC. Such cases totalled 22,667 over the period covered by this report.

These payments were prompted either by the initial letter or telephone call to the debtor, with the DRD powers acting as an effective deterrent. Only a small proportion of debt, £361,678, needed recovery through direct DRD action, that is the money was deducted directly from the debtor’s account.

The details of HMRC’s actions regarding DRD are shown in the table below:

Summary of DRD action taken - April 2016 to December 2018

Total number of debtors considered for DRD action:	22,667
Total number of vulnerable customers identified:	42
Total number of information notices issued (having excluded vulnerable customers):	1,576
Total number of Hold notices issued:	45
Total number of deduction notices issued:	20
Total number of payments deducted:	19 (value of payments £361,678.00)

The findings demonstrate that DRD has had a significant deterrent effect, leading to improved recovery of tax debts. The intervention was introduced to target those taxpayers who actively choose not to pay or delay paying, even though they have sufficient funds to do so.

Therefore the intervention has met HMRC’s policy objectives in that it has been effective in ensuring the government is paid what it is owed and has helped to reduce the unfair advantage these debtors have over those who pay on time.

The deterrent effect of DRD has resulted in payment being recovered early in the DRD process, resulting in only a small number of cases where deductions have had to be made by HMRC.

The benefits so far derived from DRD action to date have outstripped the original forecasts for the year 2017 to 2018 and for the year 2018 to 2019, as shown in the table below:

Year	Original forecast	Revised forecast (where appropriate)	Actual receipts
2016 to 2017	45,000,000	N/A	£44,820,000
2017 to 2018	45,000,000	£70,000,000	£72,640,000
2018 to 2019	£45,000,000	N/A	£60,687,129 (up to end of December)

7. Impact on debtors targeted by DRD action including processes for vulnerable customers

7.1 Vulnerable taxpayers

HMRC is committed to providing vulnerable customers with the extra support they need to manage their tax affairs. In identifying whether a customer is vulnerable, various factors are considered such as age, physical and mental health and life changing events such as bereavement. HMRC has well established processes to support vulnerable customers to pay their taxes.

The DRD legislation includes a commitment for HMRC to consider whether a taxpayer may be of “particular disadvantage” (for example facing hardship). HMRC is able to identify if a customer is vulnerable or of a particular disadvantage at various stages where contact is made with the customer and where the customer chooses to declare that information to HMRC.

The Money Advice Service provides advice on their website on how much money people should have set aside for emergency savings. Their advice is to have 3 months’ essential outgoings available in an instant access savings account. So, someone who spends £1,000 per month on mortgage or rent, food, heating and other essentials should aim to have £3,000 in emergency savings. From that perspective, HMRC’s safeguard of leaving £5,000 in a debtor’s account may be viewed as being particularly strong.

A total of 42 vulnerable taxpayers were identified through the DRD process. Of those, 29 taxpayers were identified as vulnerable through face to face visits by HMRC officers. A further 13 vulnerable customers were identified through telephone contact before the face to face visit or following an unsuccessful (no contact) face to face visit.

The low population identified confirms that current practices, including existing upstream debt management processes, have successfully mitigated against DRD action being used on customers who may be vulnerable.

7.2 Objections, appeals and complaints

Where a taxpayer wishes to dispute HMRC’s actions concerning DRD, the taxpayer can pursue their case by lodging an objection with HMRC and/or by lodging an appeal with the County Court.

Objections

Objections follow a formal process contained within legislation. Objections can be raised on the following grounds:

• debts have been fully or partly paid
• the tax debt due is disputed
• DRD action will cause hardship
• there is an interested third party in relation to the affected accounts

An overview of all the objections made to HMRC, including appeals lodged with the County Courts, alongside their outcomes is set out in the annex of this report. In total, 8 objections were raised to HMRC.

The main reasons given for objecting were either disputing the tax debt owed or on the grounds of exceptional hardship. Of the 8 objections, 7 were not upheld, as an Independent Review team determined that the correct course of action had been taken. One objection was upheld, as the debtor was able to provide additional evidence of hardship beyond that which they had initially provided to HMRC, so DRD action was stopped.

Appeals

Of the 8 debtors who lodged objections, 3 took further action by applying to the County Courts to appeal HMRC’s decision.

Of the 3 appeals lodged with the County Courts:

• one case resulted in the cancellation of DRD action and the debtor being repaid the payment deducted, as the debtor had applied to the Courts on the penultimate day of the appeal window without notifying HMRC, so HMRC deducted the payment without knowing it was under appeal

• another appeal case saw the debtor agreeing to pay the outstanding tax debt owed

• the third appeal case followed from an objection by the debtor on grounds of hardship - HMRC rejected the debtor’s objection on the basis that the debtor had not provided sufficient evidence for hardship. The County Court backed HMRC’s stance and did not uphold the debtor’s appeal

In order to address the issue highlighted in the first appeal, HMRC has amended its process by adding an extra 3 working days for the debtor to receive the letter before taking DRD action, contacting the debtor by telephone once the extra 3 days are up to advise that deduction is about to take place, and adding to the objection reply letter a request for the debtor to contact HMRC immediately if they file an appeal at court.

The objection and appeals processes enable debtors to challenge HMRC’s decision if they believe they are being treated incorrectly. However, only one of the 8 objections lodged led to a successful appeal, demonstrating that operational processes have been applied to appropriate customers in the correct way.

Complaints

In addition to the formal objections and appeals processes laid down in legislation, debtors may complain about HMRC’s actions under DRD in the same way as about any other HMRC action. Complaints received concerning DRD processes follow the standard HMRC process for dealing with complaints.

HMRC received 6 complaints from debtors. They break down as follows:

• 2 complaints disputed the debt owed
• 2 complaints were about the hold notice placed on the debtors account
• 1 complaint was about the tone of the letter
• 1 complaint was about the deduction notice applied

None of these complaints were upheld by the internal Debt Management Complaints team, which is independent of the DRD team. All 6 complainants went on to raise objections, which are included in the 8 objections referred to above.

8. Conclusion

The DRD intervention has achieved its policy objectives and has provided HMRC with a crucial lever in tackling those debtors who deliberately choose not to pay their tax debts, while being able to afford to do so. Additional tax revenue totalling £178 million was recovered through DRD intervention, reducing any unfair advantage those debtors have over the compliant majority.

The low level of complaints, objections and appeals, the extremely low level of these being upheld, and the small proportion of vulnerable customers identified further confirm that the correct debtors are being taken through formal DRD processes.

9. Annex - objections and appeals

An overview of all the DRD objections made to HMRC, including appeals lodged with the County Courts, alongside their outcomes.

Debtor 1

1. Objection lodged with HMRC on grounds that debtor is disputing tax debt owed.
2. Objection is not upheld as debtor did not meet criteria to fulfil objection process .
3. Debtor submits application to County Courts to Appeal hold notice applied by HMRC.
4. DRD action ceases as Appeal was applied on 29th day and debtor failed to inform HMRC, subsequently debtor was repaid the amount deducted from their account.

Debtor 2

1. Objection lodged with HMRC on grounds of debtor not having received notification from HMRC of hold on bank account and hardship.
2. Objection was not upheld as debtor did not meet criteria to fulfil objection process.
3. Debtor submits application to County Courts to Appeal, claiming hardship.
4. DRD action ceases and Appeal action has ended as debtor pays tax debt owed.

Debtor 3

1. Objection lodged with HMRC on grounds debtor was claiming hardship.
2. Objection upheld on the grounds of hardship following case review and DRD action ceased.

Debtor 4

1. Objection lodged with HMRC on grounds debtor was claiming hardship.
2. Objection was not upheld as debtor did not meet criteria to fulfil objection process for hardship. A Time to Pay was agreed with the debtor for the debt owed.

Debtor 5

1. Objection lodged with HMRC on grounds that debtor is disputing tax debt owed.
2. Objection was not upheld as debtor did not meet criteria to fulfil objection process. Hold Notice applied to debtors account and payment was deducted from their account.

Debtor 6

1. Objection lodged with HMRC on grounds debtor was claiming hardship.
2. Objection was not upheld as debtor failed to provide evidence to support claim of hardship and payment was deducted from their account.
3. Debtor submits application to County Court to appeal claiming hardship. County Court supports HMRC’s stance and does not uphold appeal.

Debtor 7

1. Objection lodged with HMRC on grounds that HMRC took hold action without informing debtor, thereby putting debt in financial difficulty.
2. Objection is not upheld as debtor did not meet criteria to fulfil objection process.
3. Debtor advises will submit appeal to County Court, but had not completed the documents correctly as asked by the court.
4. DRD action ceases as debtor makes the payment in full, clearing debt.

Debtor 8

1. Objection lodged on grounds that HMRC singled debtor out by taking action. Debtor requested hold to be lifted as been making regular payments to clear the balance.
2. Objection was not upheld as debtor did not meet criteria to fulfil objection process.
3. Debtor makes a payment to clear debt in full. DRD action ceases.