How does HMRC Debt Collection Work?
If you have received what is known as a ‘final opportunity letter’ from HMRC’s department of Debt Management and Banking, but failed to take action, then the next step may well be the appearance of an HMRC debt collector. These are either direct HMRC employees called Field Officers, or third-party companies appointed by HMRC. Currently, there are some 13 external debt collection agencies that act as subcontractors for HMRC, a full list of which can be found here.
This article explains the stages of HMRC’s debt collection process.
Overview of the debt collection stages
Notices of debt are usually triggered via HMRC’s powerful computer system. From here a succession of increasingly threatening letters will be sent, leading up to the decision to send out debt enforcement. In some situations, debtors simply cannot be located, in which case (depending on the circumstances) there is the possibility of debt being transferred and or escalated to other parties. Two examples where this is possible are PAYE and National Insurance, though not in all cases.
Stage One – Payment reminders. These are usually in the form of letters, although HMRC is about to trial the use of SMS text messages for this purpose.
Stage Two – Usually it will be the relevant tax department chasing the tax outstanding and if remaining unpaid will be escalated to another department.
Stage Three – Where debts are still unpaid, what is called a ‘Notice of Enforcement’ may follow at this stage. As its title makes clear, these notices announce HMRC’s imminent intent to enforce recovery of their debt.
Stage Four – Enforcement Action under The Taking Control of Goods Regulations – Formerly known as distraint, this stage means that HMRC instruct bailiffs to inventory, seize and then sell whatever assets it requires to settle the debts. If you need to know more about what right bailiffs have to seize your assets, read our article here.
Stage Five – Where seizure of assets does not yield enough to satisfy debts, HMRC will escalate the matter.Typically HMRC’s Debt Management and Banking (DMB) or HMRC Late Stage Debt Resolution departments will attempt to recover the tax debt.At this stage the threat of legal action against the company will usually be added to communications.
If the tax debts are substantial and VAT and or PAYE is involved other departments may get involved and escalate the matter considerably. The Securities Team and or The Fraud Investigation Service can get involved in addition to any other HMRC action.
HMRC additional action usually involves PAYE and or VAT and can lead to a Notice of Requirement (NOR) for a Security Bond and add Joint and Several Liability for the director and or any other named individual. Where PAYE is involved it can lead to the director being made personally liable using a Personal Liability Notice (PLN).
Stage Six – If tax debts remain unpaid the escalation process will lead to the Enforcement and Insolvency Teams getting involved. This department is based in Worthing and the most serious tax department in the UK. This department will want the tax paid immediately or at the least a very short, detailed and realistic payment plan. If this is not forthcoming this department can start the process to close your company.
The final stage is for the tax debt to be transferred to the HMRC Legal Department. The HMRC Legal Department will issue a Winding up Petition to compulsory liquidate the company.
Are there any Time Limits on HMRC’s Ability to Collect Debts?
Generally there are no time constraints on HMRC tax debts and the debt can even be transferred from generation to generation in some extreme cases.The practical time limits vary from situation to situation. Business Rates, for example can be collected for up to 20 years whereas income tax and VAT has no time constraints.
HMRC’s Powers for ‘Direct Recovery of Debts’
Interestingly, in insolvency terms HMRC lost the right to preference over other creditors in 2002/3 Business Enterprise Act.
Since 2015 HMRC has had the power to actually recover tax debts via asset seizure and take monies directly from bank accounts. There are stringent regulations surrounding this method, including a 30-day window when funds will be frozen but not removed to enable objection. Primarily this change in law was brought about to tackle the growth in tax avoidance schemes which HMRC saw as serving no other purpose in law but to avoid paying tax.
Accelerated Payment Notices (APN) usually involve individuals though this may also involve a company. The APN allows HMRC to ask for certain taxes to be paid upon request as it believes the avoidance scheme in question is an identified avoidance scheme. These amounts involved are usually substantial and can impact greatly on the company and or individual.