Under new proposals announced in the Budget 2014 small print, the taxman will be able to access personal and business bank accounts to directly take any arrears of tax you may owe.

How will it work?
If you, or your business owes more than £1,000 in arrears of tax (inclusive of all forms of personal or business taxation), you could be at risk.
Under new proposals due to come into force in April 2015, HMRC will be able to dip into bank accounts. They will not require a court order, nor will they have to issue formal proceedings – as long as they have sent reminders chasing tax arrears. So if you or your business owe more than £1,000 and have been sent correspondence from HMRC, under the new proposals, cash can be taken directly from your bank accounts to settle HMRC debts. HMRC will be required to leave a minimum of £5,000 in your accounts, but anything over can be used to settle their debt.

How will I know HMRC have me in their sights?
Bar the usual reminders for repayment of tax arrears, the first you might know would be when you check your bank and see the money taken! HMRC will be required to inform you after the money has been taken, and you then have 14 days to negotiate a settlement plan, which if they don’t agree with, they will get to keep the money in any event. If you do agree a settlement plan, part or all of your money could be returned to you.

What’s behind this?
Prior to insolvency reform in 2002, HMRC or the Inland Revenue and Customs & Excise as they were then known, enjoyed preferential status in insolvency proceedings. In a formal insolvency, tax accrued within the 12 months prior in the case of the Inland Revenue, and 6 months prior for Customs & Excise were ‘Preferential’, and assets realised in the liquidation, administration or bankruptcy were paid to Inland Revenue/Customs & Excise in priority to unsecured trade creditors. In 2002, this preferential status was removed to ensure a level playing field amongst unsecured creditors, and to ensure a better return from insolvency procedures to trade creditors.

Since then, as the economy has declined so have UK Plc’s tax receipts, and across the board HMRC have been looking at ways to recover the loss of income. Cynically, the new cash grab proposals could be viewed as a way of rebalancing potential insolvencies back in favour of HMRC. In reality they have the potential of going further than their ‘Preferential’ status ever previously allowed them to.

Who will be the winners and losers?
Undoubtedly, HMRC will increase their tax receipts. Conservative estimates for the 1st year from HMRC are for an increase of £65million. Once the systems are properly in place, they will be expecting an annual increase of multiples of that figure.

Surely, increased tax receipts are always a positive?
Without doubt any increase in UK Plc’s income is welcome news. However, the manner of the proposed tax grab could end up creating more problems than it solves.

My concern is that HMRC do not have to go through formal procedures before taking the money. Without a court application, or some other form of independent ‘check and balance’ on HMRC’s decision making there is a real risk that the tool could become used as the ‘gun to the head’ in settling disputes.

Another thought is that the majority of the cash held by small to medium size businesses is working capital for immediate to three months call, such as payment of staff wages, rent, or stock purchase. If money is removed from their banks without notice that is likely to be the spark that lights a full blown insolvency . Imagine that money had been earmarked for stock to complete an order that would help the businesses fortunes turn? Now the cheque for the stock purchase has bounced and all goodwill lost with the supplier! It’s not difficult to see how the unanticipated removal of cash from the business can quite quickly force the demise of a business that may otherwise have been able to reverse a temporary cashflow glitch.

Being even more cynical, HMRC will be aware of when in a business’ cycle a business pays its salaries (or in the case of an individual tax payer – when that person gets paid). Just prior to this date is generally when a business holds its highest monthly cash level. What if HMRC planned its cash raid to coincide with the salary cycle? Potentially 1000s of extra employees every month are then left without wages.

What can be done?
It seems that the new scheme will not be operational until April 2015, so between now and then hopefully a ‘checks and balances’ element is added to ensure that the effect on individuals and businesses is not rode roughshod over.
We will be keeping a close eye on what announcements are made and will update people accordingly. In the meantime, we will consult with HMRC and add our concerns. Until details of the final proposition are released it will be a case of watch this space…

In the meantime if you have any queries, contact me on 0191 303 7170 or ewall@robsonscott.co.uk

Eamonn Wall