FOI release

Section 14 - Debt collection process

Published 23 April 2020

Below we set out HMRC’s general approach to debt management and more details on the approach for disguised remuneration (DR) avoidance and the loan charge.

General approach

The expectation is that people should pay their tax debts on time and it is only fair to citizens that where individuals can afford to pay their tax, they do so. More than 90% of people pay their tax on time. Where a customer is unable to pay in full, then HMRC will move to a discussion about Time to Pay arrangement. This is always a preferable outcome to any enforcement action, as it is a better solution for the customer and lower cost for HMRC. We do not want to make anyone bankrupt. Generally, we will only seek to make an individual insolvent where they are either at risk of accruing further debt or where they actively avoid paying what they owe.

Time to Pay arrangements are flexible and are reviewed periodically. If the individual’s circumstances change during the period of the Time to Pay arrangement, we can adjust the arrangement accordingly. For example, the Time to Pay arrangement can be lengthened if there is an unexpected rise in living expenses. We can only agree to an arrangement that is manageable for the individual. We will not agree to an arrangement we do not think they can complete, and it is not in our interest for individuals to default on their payments.

We routinely setup instalment arrangements, and there is no maximum period. Interest applies (currently 2.6%) throughout a Time to Pay, but once agreed no payment penalties are applied.

We do not reward staff based on debts collected or the number of DR settlements.

Process for Agreeing Time to Pay Arrangements

Details on HMRC’s approach to Time to Pay arrangements for individuals and the Income and Expenditure used during these discussions are available on GOV.UK

HMRC will start debt conversations by asking whether the customer is able to pay. Where someone tells us they cannot pay a liability in full we will work with them to understand their ability to pay by looking at their income and expenditure. We then calculate what they can afford to pay based on their disposable income. Where someone can raise funds from their assets we expect them to do so. We never ask anyone to pay more than they can afford.

When agreeing a Time To Pay arrangement, HMRC will ask the individual to complete an Income and Expenditure (I&E) form, which is standard practice across the debt collection industry. On some occasions a taxpayer may respond to the initial question about payment by saying they could pay over a short period, for example less than three months. In this scenario, we may not complete a full income and expenditure assessment. HMRC’s income and expenditure assessment is aligned with the industry standard Standard Financial Statement (SFS), used by debt charities and creditors. Where an individual has completed an Income and Expenditure assessment using the Single Financial Statement with a financial advice charity, then we will accept that for calculating a Time to Pay Arrangement.

If the taxpayer does not indicate that they are able to pay over a short period, then we will proceed to use the income and expenditure assessment to identify the income and assets that an individual has, alongside their expenses.

If they have assets, then HMRC will ask whether they can be realised and to what timescale. This timescale is set by the customer rather than HMRC because they are better informed about how to realise the value (for example, a Director of a company may consider selling their share of that company, but timing plays a major role in the price achieved).

HMRC will ask the customer about opportunities to reduce their expenditure, and will focus on any areas that are significantly different to normal expectations.

The income and expenditure enables us to identify disposable income. We use that information to determine how much disposable income an individual has available.

Disposable income is the amount of an individual’s income remaining after taking account of their household expenses. Household expenses include food, clothing, childcare costs, mortgage, utilities costs, Council Tax and travel expenses and are therefore unique to each individual.

HMRC usually expects 50% of the customer’s disposable income to be paid into their time to pay arrangement. This may be higher if the customer has very high disposable income. A customer may wish to pay more than 50% to reduce the amount of interest they pay. HMRC does not seek 100% of disposable income, so that the arrangement remains sustainable, even where unexpected expenses or reduced income occur.

Once the monthly affordable figure is established, HMRC divides the debt value by that figure to work out the length of the payment arrangement. Where a customer realises they are unable to make their payments part way through a plan, they can contact HMRC, share their new income and expenditure information and we will amend the plan.

In a scenario where the income and expenditure shows that the customer cannot repay anything, then HMRC will cease pursuit activity and put the debt on hold until we are notified about a change in circumstances. Around 90% of Time to Pay agreements are completed successfully.

Time to Pay arrangement – Usage

Time to Pay policy has worked successfully across a range of scenarios, from the financial crisis of 2008 to Foot and Mouth, and flooding, as well as previous avoidance measures, like Accelerated Payments. Time to Pay is delivered at scale, with over 600,000 customers currently paying HMRC through one.

In the year to June 2019, we agreed around 438,000 Time to Pay arrangements, with over 15,000 for more than ten years. They are also consistently sustainable, being paid successfully in line with other arrangements.

Debt collection approach to disguised remuneration and loan charge

There are existing options and safeguards for individuals who have a considerable tax debt to pay, including Time To Pay (TTP) arrangements. The general approach outlined above, will apply to any debts that fall due as result of disguised remuneration schemes, and will do so for the loan charge.

Customers unable to pay their loan charge by the due date and who earned less than £50,000 in 2017-18 will automatically be entitled to a five-year Time to Pay arrangement, and where they earn less £30,000, a minimum of seven years. This is in line with the Government response to Independent Loan Charge Review, which accepted the Reviewer’s recommendation that HMRC should extend to these customers the same payment terms that were offered to individuals who settled their tax affairs rather than pay the loan charge.

We recognise that for a small minority, bills could be considerable. These are likely to be cases where individuals have engaged in disguised remuneration schemes over many years at high salary levels.

Some individuals may be better off if they agree an individual voluntary arrangement (IVA) or Debt Relief Order; formal debt solutions for those with unsustainable debts which exists as a protection for individuals. Any customer concerned about what debt solution is best for them, should seek independent debt advice, and HMRC will route customers who complete an Income and Expenditure form and need over 5 years to pay to advice.

External debt collection agencies have no role in the collection of debts related to disguised remuneration underlying liabilities and the loan charge.

Concerns have been raised about the payment arrangements of the loan charge for scheme users. Evidence suggests that, while the loan charge will result in large bills for some scheme users, bills are affordable for the majority, and for the minority who may find themselves with very large bills, existing safeguards will mitigate the difficulties they will experience, as they do for other taxpayers in similar circumstances.

Around 90% of TTP arrangements complete on time and we have no reason to expect we will see a different rate of completion for disguised remuneration DR underlying liabilities or the loan charge debts.

Time to Pay Arrangements and Instalment Plans

Time to Pay arrangements are administered by Debt Management directorate on behalf of HMRC. They are an informal arrangement agreed between HMRC and the customer.

Instalment arrangements are agreed as part of a contract settlement to resolve a dispute. They are discussed and agreed by the directorate handling the dispute. A contract settlement is a legally binding agreement between HMRC and the customer.

The process and outcome for both are broadly the same. Broadly, Time To Pay arrangements will be more relevant for customers including the loan charge in their 2018 to 2019 Self Assessment return while instalment arrangements are relevant for those who are agreeing settlements of their underlying disguised remuneration liabilities rather than pay the loan charge.

Accelerated Payments

HMRC will identify where DR instalment arrangements overlap with Accelerated Payments. We have processes to offset Accelerated Payment Notice payments against the liabilities due under a disguised remuneration contract settlement. We have also ensured that where settlement discussions are ongoing, and agreement is imminent, no unnecessary debt collection activity is undertaken in relation to the Accelerated Payment Notice.

Go to section 15: Customer service.