HMRC gains tougher debt collection powers

Friday 3 October 2014

Umbrella company contractors who are high earners and using the Pay As You Earn (PAYE) system could see a large rise in the amount that HM Revenue and Customs (HMRC) can take from them.

Starting from this week, HMRC will be able to collect up to £17,000 per year from the pay packets of high earners who owe taxes. That is far above the original tax collection ceiling of £3,000.

HMRC dismissed the increase in power, that it has in fact been able to use since 1944, as a "longstanding feature of the payroll system" and claims that taxpayers welcome it.

There has been controversy over the course of the year about HMRC's increasing powers in terms of debt recovery. When they were initially extended during The Budget in March, ICAEW tax faculty technical committee chairman Paul Aplin said that these measures should be "bomb-proof".

During the speech, Chancellor George Osborne announced that HMRC would be given the power to take money from the bank accounts of people who owe more than £1,000 in tax or tax credits and had so far failed to respond after repeated requests to have it returned. HMRC also added that it would leave at least £5,000 available across debtors' accounts.

When the measures to take owed tax directly from bank accounts were outlined initially, The Association of Independent Professionals and the Self Employed (IPSE) also responded with concern.

Chief executive officer of IPSE Chris Bryce suggested: “The solution is not to give HMRC more and more power, it is to overhaul the system so it reflects the realities of the modern business world.”

HMRC said that it wished to increase the limit on the debt that it can collect through PAYE because it felt it was unfair to have to follow more expensive methods of collecting debts when larger sums were involved.

What's more, for those on higher incomes with debts, it said that these new rules could also potentially help them as they could stagger their debts over the course of the tax year rather than having to pay the whole lot up front.

During the financial year of 2015 to 2016, this increased threshold of £17,000 is predicted to bring an extra £115 million into the economy. Practitioners have shown less concern for this than the direct debt recovery powers because it is not set to affect people who earn less than £30,000. People earning less than this amount will still follow the £3,000 limit.

From there, an incremental scale will be put in place for debtors, with £17,000 as the maximum and that will be charged to people who earn at least £90,000.

People who are affected by this will get a letter from HMRC stating that collection through their PAYE tax code is being considered to recover any outstanding taxes they owe. They will also receive an Annual Coding Notice that will explain how much debt is set to be collected through their PAYE code. Those affected will receive this between January and March 2015 in time for the start of the new tax year on April 6th 2015.

By Victoria McDonnell

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