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DRD The new acronym that can legally pick your pocket

DRD The new acronym that can legally pick your pocket

The Chancellor’s last budget contained the announcement that he wanted to give HMRC the power to access the bank accounts of persons who they think owe them money. At first sight a worrying development in itself, though it was presented as being aimed primarily at those who had taken out tax avoidance schemes which had subsequently been overturned.

Schemes like Icebreaker used by Gary Barlow and friends in 2010 to offset taxes on invested money to slash their tax bills.

The consultation document was duly published on May 6th, and provoked widespread fears that the powers as drafted could be much more widely applied. But have the media cooked up a storm over nothing?

Maybe, if HMRC is an ethical and transparent organisation motivated to do things right. But it may not always seem to act that way, because it employs people, and people sometimes make mistakes.

There are countless stories of persons being told they owe tax who subsequently dispute it, and turn out to be right. But there are also those who describe nightmares of months and years defending themselves. And subject to a few stops and checks, HMRC now propose to just take the money they perceive as due.

While acknowledging that we all have the right to minimise the amount of tax we are liable to pay, the majority of taxpayers comply with HMRC rules by submitting returns and making payments on time.

Those that don’t fall primarily into two groups: those who dispute some element of the tax deemed as due, or those who just ignore HMRC in the futile hope that they’ll go away or forget.

And it is the advantage that these non-payers have over the majority of taxpayers that is now the focus for HMRC.

The consultation will culminate with legislation in the Finance Bill 2015. And when this is law HMRC will have the power to withdraw money from your bank, deposit and investment accounts, including ISAs and NISAs.

So if you owe tax, even if you consider it to be in dispute and being discussed, under this proposal HMRC will be able to help themselves to what is owed from your accounts.

The government says that this is not different from – and in many ways is fairer than – existing law in the US and other European countries.

The safeguards

There are safeguards though, they say. If you are an employer, they’ll not be collecting two months backlog of your PAYE without telling you. But they do refer to the 10 per cent of taxpayers who are late with their tax returns and can thereby “create a debt to HMRC”. They estimate that the new procedures could affect around 17,000 taxpayers each year – less than 0.2 per cent of self assessment taxpayers.

But that won’t stop some worrying. The cases where Direct Recovery of Debts or DRD can be used include – in addition to the obvious non-payment of capital gains and inheritance tax – VAT and national insurance contributions, and even the repayment of “overpaid” tax credits and child benefit, itself most likely the result of administrative error in the first place.

And there will have to have been an extensive communication chain that will have been ignored by the debtor prior to HMRC’s use of its new powers. The Revenue say that there will likely be nine attempts to contact the debtor, and a minimum of four attempts.

Those who owe but can’t pay will not be affected, as long as they are attempting to resolve matters through a Time To Pay arrangement and communicate with HMRC about payment.

But if you owe over £1,000 and have not completed a return, or have not acknowledged any reminders and notice of penalties, then you’d likely be a candidate.

There is one firewall: you’d have to have at least £5,000 in your accounts before HMRC can claim anything; they cannot leave you with less than £5,000.

And they would have to obtain 12 months of statements from each institution with which you hold assets to assess your spending patterns and hence your upcoming financial requirements. After satisfying themselves on this, they can instruct your banks to “hold” funds, and notify you of such, and also ask the bank to notify you as well. Being “satisfied” is of course a subjective standard, where the views of the taxman and the taxpayer might well diverge.

Guilty until proven innocent

You’d then have 14 days to either accept the decision, allowing the funds they have frozen to be allocated against tax due, or to provide proof that you’d be financially disadvantaged if they continued.

That may be all well and good for those rogues not paying their taxes when the money is available, because they either don’t want to or have forgotten.

But there will be many more that are marginal cases, legitimate cases going back years or where the safeguards might be mis-interpreted. The cases of overpaid tax credits for example, where money has been paid and presumably spent in good faith, and later found to be due for repayment: but logic suggests that there won’t be many people that have been overpaid – and so owe back – in excess of £1,000 who will also have deposits of more than £5,000 which would allow DRD to be applied. But other cases might find themselves on the HMRC radar.

Land stamp duty that has not been paid would almost certainly be more than £1,000. There have been many cases recently of errors or the deliberate non-payment of LSD, resulting in HMRC pursuing the home owner for the monies. Many will be in the low thousands, but still a surprise for a home owner under the impression that the LSD had been paid. Most notorious was the case of Wolstenholmes, the Manchester based solicitors who used the fact that the homeowner is responsible for LSD to deliberately manipulate LSD returns by using ficticious property values that would either not attract duty or be due just a small amount. Years after the firm was closed down by the ombudsman in 2009 homeowners found themselves being pursued for sums up to £30,000 in duty they thought had been paid, but that had in fact been pocketed by the directors of Wolstenholmes.

Had DRD been available the situation would certainly qualify.

There are ongoing investigations into tax minimisation schemes going back years, including the film industry schemes that were popular around 2000.

Fears are that HMRC will pursue the easiest cases first; it makes sense for them to prove its worth with some early results. Small companies with VAT disputes are already a major reason why some of them go to the wall. But if DRD comes in as proposed, they won’t even be able to dispute any tax claim without fear that the money will be taken regardless; if HMRC anticipate a future legal victory they will proceed, take the money immediately, but will give it back to you with interest if i) you go to court and ii) you win. Records show that HMRC wins about 80 per cent of cases.

The Treasury view is that it’s the same rules for tax dodgers as for normal PAYE taxpayers. After all, you don’t get to pay income tax at your convenience. It’s taken before it gets to you.

But in truth this is a completely different matter. Where there is a dispute the new rules mean you are being penalised in expectation of a future government legal victory: sort of guilty until proved inncocent. The state can now confiscate your money directly from your bank account and wait to see if you can afford to let the courts decide if you have broken the law or not.

You might be vulnerable if:

•           you have used a tax reduction scheme in the past, even if HMRC has been notified as required

•           you have not completed a return on time

•           you owe more than £1,000

•           and you have more than £5,000 in your combined accounts.


This might be the right thing if were targeted at only PROVEN illegitimate avoiders of tax, as the Chancellor implied when he announced it. But retrospective judgements, and the use of a big but rapidly-effective-stick for expediency are breaches of the moral fabric just as much as not paying due taxes.

It is likely that there will be more tabloid panic, closure of joint bank accounts, and hiding of money “just in case”. But if the money is hidden, is there then not a temptation not to disclose the income from it? This proposed legislation may be a classic example of the law of unintended consequences, and could tempt many, many more current taxpayers to consider even elementary avoidance just to try not to be wronged.