Introduction
Citizens Advice welcomes the opportunity to respond to HMRC’s consultation on modernizing payment and recovery of tax.
The CAB service is a network of 462 independent Citizens Advice Bureaux that provide free, independent and impartial advice from more than 3,000 locations in England, Wales and Northern Ireland. In 2006/07 the CAB service dealt with nearly 5.75 million new problems, and this included over 1.7 million problems relating specifically to debt. Of the debt enquiries 22,190 relate to tax credit overpayments and about 4,000 relate to arrears of income tax and NI contributions.
CAB advice is both free to our clients and assists people with multiple debt problems through a structured and ‘holistic’ process that aims:
- to preserve the client’s home, fuel supplies and liberty;
- to advise clients about their rights and their responsibilities;
- to allow the client to make an informed choice about how they can best deal with their multiple debt problem;
- to avoid increasing their indebtedness;
- Where possible, to empower the client to deal with the problem her/himself.
Money advice includes giving advice about a client’s income and expenditure, liability for debts, prioritising debts effectively, drawing up a budget, giving options on appropriate methods of dealing with multiple debt problems, negotiating with creditors and helping clients respond to court action for debt. Some advisers may also be able to represent their clients at court hearings related to their debt problems, e.g. possession hearings. Advisers will also advise on insolvency options, including referral to an Insolvency Practitioner for an IVA.
Overall comments on the consultation
Most of our debt casework relates to personal debt. Most Citizens Advice Bureaux do not give debt advice to small businesses in financial difficulties if they are still trading. We have therefore not answered those questions which relate to collection and enforcement of taxation from small businesses.
However, as we often advise employees of small businesses, whose employers have not paid over their income tax and national insurance contributions to HMRC, it is welcome that HMRC proposes to focus on ensuring prompt payment of PAYE (paragraphs 2.17 and 2.18 of the consultation). The consequences for the employees can be severe, potentially affecting their entitlement to contribution-based benefits. It is CAB experience that employers who do not pay over tax and national insurance to HMRC may also be exploiting their employees in other ways, for example, not paying them the national minimum wage or denying them paid holidays. If HMRC were to focus their collection and recovery efforts on not just on those employers who make late PAYE payments, but also on those who do not make any PAYE payments, this could help tackle the widespread exploitation of vulnerable workers.
Here are only a few recent cases reported by Citizens Advice Bureaux:
A Berkshire CAB reported that a man who had worked for his current employer for over two years, discovered that his NI and tax contributions have not been paid to HMRC by his employer when he was off sick. The client told the CAB that he had not been given any P60s and received payslips only spasmodically; which show his net pay and that PAYE deductions have been made. When the client contacted HMRC, he was told that the NI number given on his payslip does not exist and as far as they are concerned he has been unemployed for the last two years. The client had been alerted to the problem by a colleague, who was in the same position.
A CAB in Cornwall reported that a Polish woman who was employed as a waitress in a local hotel sought advice about her employment situation. She had obtained employment in the UK via an agency, who told her that her employer would arrange for her registration for work, and obtain a National Insurance number for her. However the hotel did not register her for NI, so she did not get a National Insurance number, nor did they tell her that she should register under the 'Workers' Registration Scheme'. The client was also given no pay slips, and she was paid less than the minimum wage. The client subsequently applied for an NI number via Jobcentre Plus. When she told her employer that the Job Centre had asked her to bring in payslips to support her application, the employer said that he would provide her with false pay advice notes showing an income of only £95 per week, when in fact she was paid between £150 and £200 for 40-50 hours a week. The CAB calculated that the client was possibly underpaid over £1,500.
A CAB in the West Midlands reported that a Polish man had been working for an agency as a meat packer for 14 months. The way in which he received his pay has many problems but because of his limited English, he had been unable to sort them out. The problems included:
his pay was split. Part of it was paid under PAYE, and the balance shown 'CT expenses offset' and not taxed under PAYE
he had only recently been allocated a National Insurance number, but had been paying NI under a temporary number
he had a deduction for holiday pay but despite requests, has not received his holiday pay for last year.
He had been charged £9.50 for administrating the payment of his wages
He had signed various papers without knowing what he was signing, as his spoken English was limited, and he could not read English.
Although the client had spoken to an Inspector of Taxes about these issues and had been told that the way the wages were paid was 'barely legal', the Inspector had told him that there was nothing they could do, other than give him a phone number to report the issues.
We receive very little evidence about how HMRC collect and enforce payments of income tax and VAT. In contrast we receive a lot of evidence about how HMRC calculates, collects and enforces overpayments of tax credits. We have therefore focused most of our response on this issue.
We now turn to relevant questions posed in the consultation paper:
Setting off repayments of one tax against debts of another
Would it be helpful to claimants to use tax repayments owing to them to off-set any tax credit or child benefit overpayments?
Citizens Advice strongly agrees with HMRC’s statement at paragraph 3.13 that payments of ongoing entitlement to tax credits and child benefit will not be off-set against tax debts owed to HMRC as this would cause undue hardship. We consider that it could be helpful to tax credit claimants if a tax refund could be offset against any overpayment due, if this would avoid enforcement action.
Removing inconsistencies in current enforcement powers
Whether there are any types of debt that should still be considered separately, and if so why?
Citizens Advice believes strongly that it would be unfair if overpayments of tax credits and child benefit were recovered in the same way as underpayments of tax and VAT, for a number of reasons.
The nature of the debt
These are essentially state benefits, administered by HMRC rather than the Department for Work and Pensions or local authorities. Overpayments of other benefits can be recovered either by deductions from ongoing entitlement or by taking county court action. Neither DWP nor local authorities can recover overpayments by use of summary distress or the new powers proposed by HMRC in paragraphs in paragraphs 5.5 – 5.17 of the consultation paper.
Poor administration
In the experience of CABx, HMRC administration of tax credits is poor. Claimants often find that they are required to repay overpayments which are caused by HMRC error, and letters explaining how the overpayment has come about contain insufficient information for them to understand what has happened. Nearly half of all the enquiries to CABx about tax credit overpayments related to questions of liability to repay. This is much higher than for all debts, where only 14% of enquiries related to liability to pay.
A CAB in Greater Manchester reported that a woman received a letter from HMRC in June 2007 stating that they would be looking into her previous award for 2002/03 as an overpayment might have occurred. Subsequently she received a letter from the HMRC debt management office in Manchester asking for repayment of £2,216 for an overpayment of tax credits for the period ending October 2003. The letter gave a deadline of 23rd September 2007 for paying the money back, otherwise enforcement proceedings would go ahead. When the client phoned the tax credits helpline, they admitted that it was their error and they would send her a breakdown of the awards from the period in question. The client had still not received this and was adamant that she had notified the HMRC of every change in circumstance since her first claim. When the CAB spoke to the debt management office, they were told that the overpayment was due to the client not declaring her correct income until the end of the tax credit year 2002/03. The initial overpayment was £3270.34 and because of a mistake made on behalf of the HMRC this was reduced by £1053.57, leaving an overpayment of £2, 216 outstanding.
Who is liable
If the tax credits claimant is one of a couple, the claim is based on the income and circumstances of both parties. If an overpayment arises on the couple’s claim, both parties are liable to repay it. In contrast, an individual’s or a sole trader’s tax is calculated on their income alone.
The issue of liability for tax credit overpayments is particularly problematic when a couple splits up and they are liable for an overpayment or when a couple get together and one of them already has an overpayment on their previous claim. In these circumstances, the overpayment cannot be recovered from the new claim, and can only be recovered by other methods. At the same time, HMRC could be recovering an overpayment on their current claim by deductions from entitlement. Our evidence suggests that HMRC’s Debt Management Unit are not always aware of the overpayment on the current claim and may insist on unaffordable repayments to the overpayment on the previous claim, leaving the claimants in severe hardship. Evidence from CABx also suggests that HMRC chase the partner still in receipt of tax credits, even if they are worse off:
A CAB in Cornwall reported that a woman and her ex-husband had tax credit overpayments totalling £1,200 for the year 2005-2006. The client spoke to the Tax Credit Office, and offered to pay her half by paying £400 immediately, and the balance at £18 a month over the next year. However, HMRC told her that they might still take her to court; and when she told them that she 'was not prepared to pay her husband's half', they said HMRC would go after the weaker partner. The client was living with a new partner, they were both working and had a mortgage. Her 10 year old son lived with them for half the week, and spends the other half with his ex- husband. The debt could not be recovered from her current tax credit claim. When asked about the impact this is having on her, the client wrote, 'After 25 years of being married, (now divorced for the past two years), I am still being accountable for debts that my ex husband and I both shared. Although I am willing to pay off my debts of half the amounts owed, he is not acknowledging his debts at all, so it seems I am being asked to pay all of the amount! Which I feel is totally unfair. At the heart of this is a ten year old child who is happy at the moment and I want him to remain that way”.
A CAB in Somerset reported that a lone parent on income support and child tax credits had an overpayment of tax credits which had arisen when she was living with her husband. As the overpayment arose when it was a joint claim, it could not be recovered on a single claim. The client subsequently decided to get back together with her husband when his tenancy ran out. She then received a letter from HMRC demanding payment in full of the overpayment otherwise they would take court action.
The impact on housing benefit
Many tax credit claimants are on very low incomes indeed, and may be entitled to help with their rent by claiming housing benefit, which is a means-tested benefit. Tax credit is an income which is taken into account for housing benefit purposes. Where an overpayment of tax credits is being recovered by deductions from an ongoing claim, the actual amount of tax credits received is taken into account as income (i.e. after the amount to recover the overpayment has been deducted). If the overpayment cannot be recovered in this way (e.g. in the circumstances outlined in the bullet point above), the local authority has to take into account the amount of tax credits paid, and cannot take account of repayments to a tax credit overpayment. It is inequitable that the amount of housing benefit that a tax credit claimant is entitled to is different solely because of the way in which HMRC recovers any overpayment.
How this would work in practice
It is unclear how courts would distinguish between liability for tax and VAT and tax credits overpayments, if the proposal in paragraph 3.23 is implemented.
Citizens Advice believes that it is completely inappropriate to use summary distress or the proposed powers to recover overpayments of tax credits or child benefit. However, it may be appropriate in some circumstances for tax credit and child benefit overpayments to be recovered by adjusting PAYE codes. We discuss this issue later in our response.
Paying by credit card
Would it be helpful to allow taxpayers to pay their tax by credit card? Should credit card payments only be accepted for tax which is overdue, or should it be available for any tax payments?
Citizens Advice believes that creditors should provide a wide variety of ways to pay debts and ongoing commitments, including methods of payment suitable for people without bank accounts. Whilst it may be helpful for small businesses to pay tax liability by credit card (as business bank accounts are unlikely to have a debit card facility) we have concerns as to how this might work in practice, particularly for individuals who have other debts. In our experience, people in financial difficulties often use credit cards to buy essentials and to pay other debts. However this strategy often results in increased indebtedness. For example:
A CAB in Northumberland reported that when a woman with two children on benefits approached a bank to open a current account she was firstly offered overdraft facilities which she declined. She was then offered a credit card which she accepted and intended to use only in emergencies. The limit on card was £1,000. However the client had financial problems due to her partner constantly unable to keep jobs due to a depressive personality and drink problem. As she was herself suffering from post-natal depression after birth of her second child and was not working, she used the credit card to buy food and necessary items for the children. At the time of seeking advice, she owed £2,305, much of which consisted of interest accruing daily.
As we outlined in the introduction to our response, CABx aim to help people resolve their debt problem without increasing their indebtedness. But we have concerns as to how this will work in practice, particularly if people have other debts. It would be more appropriate for HMRC to accept instalments off the tax debt, rather than put pressure on debtors to pay the whole amount by credit card.
Citizens Advice therefore believes that HMRC need to consider the following issues when asking people to pay their tax debts by credit card:
- Is it affordable in the context of the taxpayer’s whole financial situation?
- Will the debtor incur extra costs?
- Is it an indication of that the taxpayer is in financial difficulties with other commitments?
In relation to passing on the transaction fee to taxpayers, Citizens Advice believes that HMRC should not charge more than the amount levied by the card issuer.
Direct attachment of taxpayers’ assets
Should HMRC have the power to attach taxpayers’ assets and property in the same way that it currently carries out distraint on moveable property?
Citizens Advice is deeply concerned that HMRC is considering methods of enforcement which do not provide an opportunity for independent judicial scrutiny. We would query some of the arguments made for these new powers in paragraph 5.11, in particular that it would benefit taxpayers because they would not have a county court judgment, which would adversely affect their ability to obtain credit from mainstream lenders. This proposal appears to contradict government policy on sharing data with credit reference agencies on debts to government, and is likely to attract criticism from the credit industry.
It is not clear from the consultation paper whether HMRC could enforce a direct attachment of property by means of an order for sale. If so, Citizens Advice considers that it is vital that a court, rather than HMRC, should make the decision on an order for sale taking into account the taxpayer’s circumstances.
As we have outlined earlier in our response, it would be completely inappropriate for HMRC to use these new powers to enforce overpayments of tax credits and child benefit. Should HMRC decide to apply these new powers to the recovery of tax credit and child benefit overpayments, there are two issues that need to be addressed:
- HMRC need to take particular care as to how the new powers will be used to recover overpayments arising from joint liability.
- Should HMRC decide to apply direct attachment to overpayments of tax credits, this must be the opportunity to improve tax credit overpayment notification letters in relation to the causes of the overpayment. The consultation paper states at paragraph 5.13 that there are appeal rights to allow genuine disputes about the amount of tax to be settled. However it is CAB experience that people do not use these appeal rights to query the amount of tax credits and whether the overpayment is recoverable until it is too late, because letters about tax credit overpayments are badly worded.
How could jointly owned assets and accounts be addressed?
Citizens Advice believes it is essential that the same rules in relation to joint assets and accounts should apply to direct attachment of assets and property as for county court third party debt orders and charging orders.
What form of safeguards would be appropriate to protect taxpayers and others affected by the attachment?
It is welcome that HMRC are considering a code of guidance as to how to apply its new powers. However this must include the following:
- A detailed explanation as to how HMRC will consider evidence of hardship, in particular whether the taxpayer has other debts
- A requirement for HMRC debt recovery staff to be transparent in their decision making
- HMRC should use other powers to recover the debt first before using direct attachments.
- HMRC must commit to not using these powers to enforce overpayments of child benefit and tax credits.
Tracing missing taxpayers
Should third parties be required to provide contact details?
Are there other ways of obtaining up to date contact details?
What form of safeguards would be appropriate?
Citizens Advice believes that it is completely inappropriate and unnecessary for HMRC to be given these powers without any form of judicial control, particularly as the Tribunals, Courts and Enforcement Act 2007 will allow creditors with county court judgments to apply to the county court for an Information Order. We feel that judicial control and regulation is needed where creditors need access to personal information.
Should HMRC have these new powers, it would be essential for HMRC to develop a Code of Practice along the lines of that developed by DWP on the Social Security Fraud Act 2001. It is vital that the Code exempts advice agencies such as CABx from providing information. We provide advice on a confidential basis; i.e. nothing learned during the course of dealing with a client (including the fact that an enquiry has been made) will be passed to anyone outside the service without the client's express permission (other than in exceptional circumstances).
Collecting small debts through Pay As You Earn
Should HMRC be able to collect small debts via PAYE?
What level of debts should be collected in this way?
What time limits should be used – i.e. how long after debts were payable could they be coded out, and for how long afterwards?
Citizens Advice believes that it would be reasonable to collect small debts via PAYE coding, including overpayments of child benefit or tax credit, as long as the rate at which the debt is recovered is affordable given the individual’s circumstances. This means that HMRC must consider whether the repayments are affordable in the light of the taxpayer’s personal circumstances, including their income, expenditure and other debts before implementing deductions. Citizens Advice believes that HMRC should consider this method of recovery before using its direct attachment powers. We do not have a view as to the level of debts to be collected in this way or the amount of time when debts should be recovered.
As we have stated above, this method of recovery could be used to recover tax credit and child benefit overpayments. We believe that this could be a useful way of recovering overpayments arising from joint claims, rather than take court action. However, we consider that HMRC would need to develop a Code of Practice on how such debts should be recovered. This should include guidance on recovering overpayments where a couple are liable for the debt, in relation to whose PAYE would be amended for debt recovery purposes.
Award of costs in debt litigation
Should HMRC be awarded costs where it receives judgment in court when taking action for unpaid debt?
At what level do you think that the costs should be set?
In our experience, adding court costs to a debt simply adds to an individual’s indebtedness. Citizens Advice believes it would not be appropriate for HMRC staff to be awarded costs where the taxpayer is in hardship or for tax credit overpayments.
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