High levels of tax debt in the spotlight at PAC hearing

Witnesses at the session were Jim Harra, Chief Executive at HMRC, Marc Gill, Director, Debt Management, HMRC, and Justin Holliday, Chief Finance Officer, HMRC. The session came after the National Audit Office (NAO) published a report that highlights that tax debt is now more than double pre-pandemic levels.

Tax debt in the pandemic

Asked by Labour’s Dan Carden about reports of £4.3 billion of fraudulent payments made through furlough, Jim Harra said the figure is inaccurate, but fraud is inevitable because of the need to get money to people fast at the time. He said the maximum figure for fraud and error is more like £3.9 billion.

Harra told Conservative Shaun Bailey that there is not a ‘statute of limitations’ that prevents HMRC from recovering tax credit debts, even from as far back as six years ago.

Dame Meg Hillier, chair of the committee, (photographed below thanks to Parliament UK) asked how HMRC have managed tax debt during the pandemic. Harra said HMRC was empathetic - the initial pause in enforcement activity gave taxpayers breathing space and enabled HMRC to rework all their communications and introduce a ‘segmentation’ approach to target taxpayers most able to pay. Tax debt reached a peak in August 2020 because of the deferral of VAT and self-assessment payments. It has fallen quite rapidly now. He said that there is no upper limit to the length of Time to Pay arrangements, even 36 months is possible. It will take a couple of years to bring tax debt levels to pre-pandemic level.

HMRC’s Marc Gill claimed 90 per cent of Time to Pay arrangements that HMRC set up with businesses and individuals pay successfully. Hillier joked: “You sound like the cuddly taxmen.” Harra replied that he was reluctant to reinforce that image, but Gill said ‘to push too hard risks driving more work into operations on defaults and dealing with the customers multiple times’.

Harra explained to Conservative Sir Geoffrey Clifton-Brown that during the pandemic there was a moratorium on creditor-led winding-up petitions for companies which was extended to personal bankruptcies as well. HMRC’s Justin Holliday remarked that the cardinal rule of debt management is the longer you leave a  debt, the harder it is to collect, and there will be some consequences of that, ‘but at the moment we really have no reliable forecast of how big that consequence is’.

Clifton-Brown said ‘rogues were still out there in the pandemic’ and suggested that those that go into insolvency should be struck off, as well as things like attaching debts to individual directors. Harra said HMRC have increased powers to tackle phoenixism, saying: “HMRC can attach liability to the officers of a company, as well as using disqualification and, increasingly, when a new business arises that is a successor of an old one, requiring financial securities up front from that business to enable it to operate pay-as-you-earn or operate VAT.”

Holliday told SNP MP Peter Grant that HMRC do not do a running estimate of the bad debt provision, rather they calculate it once a year in June or July. Harra remarked that, pre-pandemic, it was self-assessment and PAYE that was the more volatile element of debt but the pandemic has led to an increase in VAT as a proportion of overall debt balance.

Marc Gill told Conservative Craig Mackinlay that HMRC were very willing to give people Time to Pay Arrangements in the first quarter of the pandemic. But he was keen to say enforcement action is ongoing and since HMRC returned to collections this year they have done 110,000 field visits. He added: “We are looking at past customer behaviour to precision target our contact, field visits, enforcement and so on.” He explained that HMRC have not used trade sectors in targeting, rather they have used filing data and access to covid support schemes - HMRC know relative turnover and payroll - to try to triangulate, as well as previous behaviour.

Jim Harra said that while small tax debts (he used £150 in his example) are not cost-effective for HMRC to collect, it is not an amnesty – it remains on their tax record, ‘but we do not regard it as part of the recoverable tax balance that we chase’.

Harra confirmed that HMRC started a couple of years ago to collect debts earlier by coding them - or the collection of them - out in-year. Gill explained that the amounts are small but that it helps taxpayers because it replicates what they could elect to do in a year and resolves things over the rest of the tax code period.

Harra told Shaun Bailey that the reduction in VAT for the hospitality trade is just a reduction, not a deferral, so no additional liability will arise from that. There are no plans to have any sort of debt recovery policy for sectors, but to the extent that the hospitality sector has been more severely affected, that will be reflected in the segmentation that the debt management service do based on the data that they have. (The segmentation identifies, by reference to sets of data such as turnover, whether you are likely to have faced a high impact, a medium impact or a low impact from the pandemic.)

Support for vulnerable taxpayers

The NAO says 2.4 million more people have tax debts because of the pandemic. Marc Gill said the numbers of people using the extra support team ‘remain fairly constant’, with HMRC having a caseload of about 1,400 customers who access its extra support. That is due to more empathetic behaviour by HMRC and introducing the Money and Pensions Service debt advisor referrals (just for tax credits at the moment but it will include self-assessment this year). He said: “We have not seen a spike in the number of customers coming forward as vulnerable and needing our extra support services, but they are there for those who need it. For those who engage with us and who simply do not have any means at all to pay, we will not ask them to do so. We will put the case in review and contact them later.”

All debt management staff who deal with customers have been trained in how to identify a taxpayer who is vulnerable and needs extra support, Gill told the committee. They can escalate it to the extra support team, who, in turn, can refer people to mental health charities. Jim Harra said: “I would expect a significant number of the new debtors or people with increased debt to be businesses. Mr Mackinlay is not here to hear me praise the tax profession, but many of those customers are represented, so they are not just reliant on HMRC helping them.”

Lib Dem Sarah Olney is worried about affordability of payment plans for tax debtors. Marc Gill told her HMRC will calculate with the customer how much they can pay, test that and then HMRC will set up the Time to Pay arrangement based on that. There has been a really good uptake of repaying VAT through a digital service, he claimed. HMRC aim to stand up a service for business digital channels later this year. That will start with PAYE before moving on to VAT.

Gill said HMRC try exceptionally hard to identify debtors who are seriously financially vulnerable and it is ‘a huge priority for us’.

Outsourcing of debt collection

For the first time, HMRC have published the return on investment for debt management as £205 collected for every £1 spent. Labour’s Dan Carden asked why the number of staff decline over the years, from 6,200 in 2008 to just shy of 4,000, ‘when we know this is such a good investment for the taxpayer’? Harra replied that like all government departments, HMRC are expected to make efficiencies. He said HMRC calculate that, since 2015, there is about £1.5 billion additional tax that they would not have collected had they used their own internal resources.

Asked why HMRC outsource debt collection when the return investment is higher in-house than with external debt collection agencies, Justin Holliday said it gives HMRC something to compare its in-house performance to, it helps with ‘bursts of activities’ and there are certain debt sectors in which particular debt collection agencies specialise.

Carden said that each one of HMRC’s debt collectors brings in, or has done over the pandemic, £19 million per full-time official. That is more than the value of some premier league footballers, he noted. We learn that a typical debt collector earns about £20,000 per year.

Scams and phoenixism

Jim Harra told Peter Grant that HMRC are effective in tackling phishing emails and fake callers claiming to be from HMRC; there has been a marked reduction in the impersonation of HMRC, and HMRC have now dropped out of the top 100 organisations that are scammed, when they were way up at the top. Quite apart from having contacts right across crime enforcement, Harra said HMRC have got the phishing service, which gives them warning from taxpayers themselves about what they are seeing.

Harra said it is not clear that phoenix companies have increased during the pandemic. But he said in 2018-19, HMRC issued over 1,000 notices of requirement to provide security. In phoenixism cases, in ’19-’20 HMRC issued 550 notices. In 2021, only 93 notices, but although the number has gone down, the amount of tax protected has, broadly speaking, stayed up at about £370 million. Harra added that HMRC are putting together a strategy on this that will be completed in the next couple of months.

Other comments

HMRC are pushing for a more ‘single view’ of taxpayers and their debts by accessing data from other government departments and the Cabinet Office are leading on a couple of trials, but nothing major is expected in the next three years.

HMRC are aware that some companies have taken bounce back loans to pay their tax debt, or indeed taken bounce back loans that they are not using to sit there as a cash reserve when they could be using them to pay tax debts.

Clifton-Brown was told that HMRC will have 600 staff, over and above the ones they have lost, in the next three years.

The single customer account is a plan for an online account that enables a taxpayer to see all the data that HMRC hold about them, and to take transactional action on that. It might go ‘live’ in the next three years, but it will not cover ‘every tax stream’ by then.

HMRC have been given preferred creditor status in relation to PAYE and VAT debts. That means that HMRC rank above unsecured creditors but not above the secured creditors. In practice HMRC account for about 10 per cent of all insolvencies. In ‘normal times’ about 80 per cent insolvencies are voluntary, and about 20 per cent are creditor-led, and of the creditor-led HMRC account for about half. It is still quite difficult to discern the impact of being preferred creditor, because in the meantime the moratorium on insolvencies has been enforced, said Harra.

HMRC already have a significant amount of data on taxpayers from their own systems but they are carrying out tests with credit reference agency data at the moment to assess whether it is worthwhile.

The transcript is here.

By Hamant Verma, CIOT Senior External Relations Officer