How will it work?
If you, or your business owes more than £1,000 in tax arrears (inclusive of all forms of personal or business taxation) then you could be at risk.
Under the new proposals due to come into force in April 2015, HMRC will be able to dip into bank accounts without requiring a court order or issuing formal proceedings as long as they have sent reminders about the arrears.
So if you or your business owe more than £1,000 and have received correspondence from HMRC, under these 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 that can be used to settle the debt outright.
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 would 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 to a settlement plan then part or all of your money could be returned to you.
What’s behind this?
Prior to insolvency reform in 2002, HMRC, the Inland Revenue or Customs & Excise as they were then known, enjoyed preferential status in insolvency proceedings.
In a formal insolvency process, any tax accrued within the previous 12 months (for the purposes of the Inland Revenue) or six months previously for Customs & Excise were classed as ‘preferential’, and any assets realised in 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, the economy has declined as have UK Plc’s tax receipts, and across the board HMRC have been looking at new ways to recover this loss of income.
The new “cash grab” proposals could be viewed as a cynical way of rebalancing potential insolvencies back in favour of HMRC. In reality they have the potential of going even 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 first year from HMRC are for an increase of £65 million. Once the systems are properly in place, they will be expecting an annual increase in multiples of that figure.
Aren’t increased tax receipts always a positive?
Without doubt any increase in UK Plc’s income is welcome news. However, the manner of the proposed cash grab could end up creating more problems than it solves.
The concern is that HMRC don’t have to go through any formal procedures before taking the money. Without a court application, or some other form of independent checks and balances on HMRC’s decision making there’s a real risk that the tool could become used as a “gun to the head” in settling disputes.
Another crucial point is that the majority of the cash held by small and medium size businesses is working capital for immediate to three months call, such as payment of staff wages, rent, or stock purchase.
If this money is removed from their banks without notice it’s likely to be the spark that lights a full blown insolvency.
Imagine that money had been earmarked to buy 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 a business can quite quickly force its demise when it could quite easily be able to otherwise reverse a temporary glitch in cash flow.
If you were being even more cynical, you’d understand that HMRC is well aware of the point in the monthly business cycle when salaries are paid and received.
It’s just before this date that businesses generally hold their highest monthly cash level.
What if HMRC planned its cash raid to coincide with the salary cycle? This could potentially leave thousands of employees every month without wages!
What can be done?
The new scheme won’t be operational at the earliest until April 2015, so between now and then hopefully a checks and balances element is added to it to ensure that individuals and businesses aren’t rode roughshod over and left without money to survive.
We’ll be keeping a close eye on what further announcements are made and will update readers accordingly.
In the meantime, we’ll add our voice to those who are replying to the HMRC consultation with our concerns. Until the details of the final proposition are released then it’s a case of being alert and watching this space.