The Building Societies Association represents mutual lenders and deposit takers in the UK including all 44 UK building societies. Building societies have total assets of nearly £330 billion and, together with their subsidiaries, hold residential mortgages of over £230 billion, 18% of the total outstanding in the UK. They hold over £230 billion of retail deposits, accounting for 19% of all such deposits in the UK. Building societies account for about 28% of all cash ISA balances. They employ approximately 39,000 full and part-time staff and operate through approximately 1,600 branches.
We agree that HMRC has a duty to collect tax it is due and that it should take action against those that will not pay. In no way does the Building Societies Association – or its members - condone deliberate non-payment of tax.
But we do not agree with this proposed new power or consider that there are adequate safeguards. HMRC already has the power to directly recover tax and tax credits from bank accounts; it needs a court order, however. The existing civil remedies are indeed better than these new powers. Under these new plans HMRC removes judicial oversight; it will be “judge, jury and executioner”. This attempted circumvention of the courts is a subversion of the rule of law.
Giving HMRC power to remove money directly from taxpayers’ accounts is a return to crown preference by the back door, a power that parliament abolished over ten years ago.
Far better would be for HMRC to address its own inadequate debt management processes.
We share the concerns of dozens of other stakeholders – lawyers, politicians, charities, professional bodies and trade associations among them – that HMRC lacks the correct figures for “established debt” (which, apparently, only it may determine). Examples abound of HMRC chasing, almost always aggressively, debts that are not due. HMRC needs to address how to engage with taxpayers fairly. How can the banking profession be confident that HMRC’s processes are robust and that officials have correctly identified debtors, communicated with them effectively (not just the usual stream of letters) and have proof they will not pay their debts?
Crucially, HMRC is basing its plans on the ability of building societies’ and banks’ regulatory returns to provide evidence of funds – returns that can be up to two years out of date.
We have worked with the British Bankers’ Association in particular on these proposals so there is considerable overlap between the two responses. This is intentional.
The rights of our customers
The consultation paper says that taxpayers will have recourse to “judicial appeal”, a term unknown in English law. Some consider this to mean judicial review; however HMRC officials say it refers to the ability of the taxpayer to challenge its actions additionally through the county courts and the First Tier Tribunal. While this explanation is undoubtedly welcome, it represents an expensive and complex route for taxpayers. Such a route is hardly accessible or fair for the vast majority of taxpayers. One law firm has estimated that a debt needs to be a minimum of £100,000 before it is economically viable for a taxpayer to engage it.
While HMRC considers that the debtor may have the option of challenging the assessment of tax through the First Tier tribunal, HMRC has been unable to provide details to the BBA of the number of debtors with whom it has never been able to make direct contact (known by HMRC as “right party contact”). If HMRC has never successfully made right party contact with the debtor, then s/he may not be in a position to know that s/he can or should exercise the right to challenge in the First Tier Tax Tribunal.
Clarity on the appeal issue is vital. As argued by the barrister Jonathan Schwarz, permission of the courts is necessary to allow money to be taken from a debtor’s bank account:
“The court’s function is to ensure that all the correct procedures are followed, that the claim is justified and that all relevant circumstances are taken into account. Courts may refuse an order if it would be inequitable to grant it. This would take into account all relevant facts, not just those HMRC might. These factors include the insolvency of the debtor. To do otherwise may be to grant a preference to the creditor.”
Schwarz also reminds us it is a fundamental principle of natural justice that nobody should be a judge in their own cause, nemo iudex in re suo. He continues: “Thus while the courts provide only one method of dispute resolution between citizens, it is one that is critical where the government or the executive is involved and independence is necessary.”
The British Bankers’ Association has pointed out that seizing funds or freezing accounts without judicial or independent oversight runs counter to the regimes for the General Anti-Abuse Rule and the Code of Practice on Taxation for Banks. In these regimes, HMRC has conceded that independent oversight and scrutiny were necessary before a sanction is applied, to achieve fairness. Like the BBA, we are not convinced that HMRC is always capable of acting dispassionately. The BBA notes that in Kestrel Guards Limited v Revenue & Customs  UKFTT 184 (TC) the First Tier Tribunal (Tax Chamber) comments: "In keeping records, and producing them to the Tribunal, that untruthfully show the taxpayer as having refused to pay its tax liability, HMRC is acting unfairly and probably unlawfully. Fortunately, we have not been misled by this erroneous record."
Human Rights Act 1998
HMRC will need to satisfy itself that the proposals do not contravene the Human Rights Act 1998. In particular it should examine whether the proposal breaches Article 6(1), in that damage is done by removal of funds before any right to challenge arises or without adequate judicial oversight or safeguards. Administrative decisions made by public bodies that are not courts or tribunals, such as by HMRC in this case, must comply with Article 6(1) unless there is a right of appeal to a court or tribunal that does comply with its requirements. The proposal contains no such right of appeal to an independent tribunal.
Article 8 of the Act protects the private life of individuals against arbitrary interference by public authorities. It imposes a negative obligation not to interfere with an individual’s private life, family life, home and correspondence and a positive obligation to take steps to ensure effective respect for private and family life, home and correspondence, between the state and the individual, the individual and private bodies, and between private individuals through law enforcement, legal and regulatory frameworks and the provision of resources. As it is a qualified right, the circumstances in which a public authority, such as HMRC, can interfere with the private and family life of an individual are limited to those set out in Article 8(2). The proposals could give rise to a breach of Article 8 from the disclosure of personal information of family members, affected indirectly, by the proposals, such as joint account holders.
And what of the human rights of deposit takers? Their deposits, used to make loans, for example, are to be accessed by an arm of government. Businesses have human rights - this has been the long-standing position in EU law and been confirmed in England & Wales in Wilson v First County Trust  3 All ER 229. It is inappropriate to interpret those rights restrictively (Delacourt v Belgium (1970) 1 EH). We agree with the BBA’s comment that the proposals do not strike a fair balance between the demands of HMRC for an administratively convenient means of collecting unpaid tax and of the general interest of the community, to have access to borrowing, and the requirements of the protection of the deposit takers’ fundamental rights. In this case, the obvious and compelling public interest to collect tax should be weighed against the equally compelling public interests of the peaceful enjoyment of possessions to support the provision of affordable credit.
Costs over justice
As with its earlier informal attempt in 2011 to introduce account freezing, HMRC is contemplating this change in process to save costs and reduce the time taken to collect a debt. The process is quicker only because it omits the checks and balances of a fair court process. We simply do not believe the cost argument: HMRC is able to recover its costs under the current court-based options – freezing injunction or a third party debt order - except, of course, where it loses its cases. Then it bears its own costs.
As the BBA, among others, has pointed out, HMRC says that speed is at issue because the length of the court process affords the debtor the opportunity to dissipate his/her assets. We note, however, that the process proposed in the consultation paper, which would entail four to nine attempts to contact the debtor, will equally put the debtor on notice to dissipate his/her assets. The new power could be circumvented by a debtor investing in other financial products, such as insurance products or funds, or simply transferring assets to a third party account.
No attempt has been made to calculate the cost to deposit takers, which will ultimately be borne by all their customers, not just those that owe tax. This is a serious omission. All the consultation paper says is the process “may carry an associated cost”.
Few building societies can implement partial account freezing as outlined. For our larger members, it is not just one system either – many operate several legacy systems. Such systems development would cost huge sums – even if the society (or bank) has the resources to do so. The new powers hit smaller deposit takers even harder – they would most probably have to outsource the work to the detriment of more important customer-facing activities.
On top of this expense is the cost of processing each individual request. Should these new powers be introduced in some form, we consider that deposit takers should be reimbursed for the reasonable costs of each case they process. With child maintenance deduction orders, the costs are charged to the debtor.
Apart from the not insignificant systems development, staff training at branches and call centres would be needed. Whatever HMRC claims it will say in its communications, an aggrieved debtor’s first port of call will always be his/ her building society (or bank).
Any future impact assessment should also include the cost of legal challenges or the reputational damage resulting from the wrongful application of these powers. The impact of aggrieved customers upsetting other customers and not to mention branch staff cannot be underestimated. It could lead to customers thinking their money is not safe and cashing out their savings, leading to a return to cash “under the mattress”.
Perhaps most importantly, we consider that the impact assessment should show the tax collected (including a detailed analysis of how the 17,000 figure for debtors is calculated) against the start-up and ongoing costs to all stakeholders.
Interaction with other legislation
We refute categorically the suggestion that these powers are similar to those used for child maintenance deduction orders. This is erroneous on several levels:
with CMDOs the entity that is owed money – the parent in this case – does not freeze and remove the value of the debt as with HMRC’s proposal. This is done by the Child Maintenance Service.
under the CMDO scheme, joint accounts are not ordinarily targeted; neither are accounts used for business purposes. Regular deduction orders are only made against business accounts used by sole traders if there is no other suitable account to use.
deposit takers’ guidance states that CMDOs operate in a similar way to third party debt orders. The account holder and deposit taker have 14 days from the date a copy of the interim order has been served to make representations to the Child Maintenance Service. If after considering a final order should be made, the account holder or deposit taker is able to appeal to the court against the final order within 21 days of the order having been served. As previously argued, any appeal mechanism is at best expensive and complex, and at worst opaque, in these proposals.
Like the BBA, we ask if it is appropriate for HMRC to obtain greater powers of investigation and recovery than those available to law enforcement agencies under the Proceeds of Crime Act 2002 and the Police and Criminal Evidence Act 1984. Both POCA and PACE place obligations on those operating the powers of investigation commensurate with the interference involved. In particular, appropriate officers must consider at every stage whether the necessary objectives can be achieved by less intrusive means. An appropriate officer will have to satisfy a judge that any infringement of, for example, a person’s right to privacy under Article 8 is proportionate to the benefit to be gained from making an order or warrant.
Other stakeholders have documented in detail the catalogue of errors HMRC has made, and continues to make, and the impact on individual taxpayers on a seemingly daily basis. We will not repeat them here. But we urge HMRC to reflect on comments made by parliamentarians, for example, those made at the discussion on HMRC’s business plan at the House of Commons Treasury Committee on 8 July 2014. John Thurso MP asked why one organ of government should have access to taxpayers’ accounts and not others. The same MP said there was a "small but important" level of error in HMRC judgments on tax owed. He said given that HMRC wanted to be "judge, jury and executioner", it was concerning that HMRC was seeking to remove the legal process because it was slow and expensive. At the same discussion, Steve Baker MP said he was "horrified" HMRC was trying to take such steps on the grounds of expediency. In view of such parliamentary outrage, we question why an arm of the executive – HMRC – is trying to push through such powers.
Concrete evidence of HMRC’s lack of the correct figures for “established debt” may be found in the Adjudicator’s latest report, for 2013 (The Adjudicator investigates complaints from individuals and businesses unhappy about the handling of their complaints by HM Revenue & Customs, the Valuation Office Agency or The Insolvency Service). In 2013, the Adjudicator’s Office received 1,331 new complaints, resolving 525 complaints and upholding 55% either partially or substantially. In 2013, complaints against HMRC (including PAYE) rose by 347% and complaints on tax credit 59% for the same period compared to 2010-11. These already worrying figures are bound to rise further if this scheme takes effect.
We would like clarification on the term “established debt”. Will HMRC take action where the amount is in dispute such as a tax credit overpayment? Examples abound of HMRC chasing, almost always aggressively, debts that are not due. How can the banking profession be confident that HMRC has correctly identified debtors, communicated with them effectively (not just the usual stream of letters) and has proof they will not pay their debts?
We believe the existing civil remedies are better than these new powers. But what does need changing is HMRC’s debt management systems and processes. The Public Accounts Committee has castigated HMRC for its £15.1 billion (out of total government debt of £22 billion) it has failed to collect. Worryingly, HMRC is one of the government departments using private debt collectors on a payment by results basis in 2012-13. PAC has claimed the government has not been able to show it understands the benefits and risks of using these agencies and expressed concerns about the risks of vulnerable debtors being pursued inappropriately and government unwittingly using unsuitable companies.
Debt collection agencies have collected approximately 22% of the amounts sent to them, with considerable variation according to the type of debt. They typically have retained 7% of the debt they collect as their fee. The use of debt collection agencies is set to expand significantly with the introduction of a “debt market integrator”, intended to provide a single route for all government departments to access private sector debt services. The Cabinet Office and HMRC acknowledge that they are still learning how and where to make use of debt collection agencies’ resources and expertise and how to ensure debt collection agencies perform effectively across the board.
HMRC says the average debtor owes £5,800 in unpaid tax and tax credit. It also says there are 17,000 debtors who owe more than £1,000. But it provides no evidence. This is a grave oversight and casts doubt on the accuracy of such figures, particularly when in 2011 HMRC thought 5,000 such debtors existed.
The proposed threshold of £1,000 of tax and tax credit owed for such a punitive power is too low and will potentially catch out a raft of taxpayers who are unintentionally non-compliant. Such a figure could hit a small business disproportionately hard and have unintended consequences in the form of unpaid salaries. In certain circumstances, a small business could be made insolvent. A more credible threshold is therefore £10,000. We also consider that there should be different criteria for different taxes.
To establish funds available in a taxpayer’s account, HMRC proposes to use Type 17/18 returns (submitted under schedule 23 to the Finance Act 2011). This is not an accurate indicator, however, due to the time difference between the period to which the return relates and the date at which HMRC might wish to access the funds. In some cases the gap is nearly two years. There is also the fact that interest rates vary over time and between accounts, so those returns do not provide a clear, nor a consistent, picture of the levels of funds in the accounts. The returns provide at best only a historic view of savings – taxpayers could well have withdrawn some of the funds or closed the account in the interim. And as BBA has pointed out, compensation interest is also now reported in Type 17 returns and HMRC will have no way of distinguishing between compensation interest and savings interest.
If a taxpayer has several accounts with different deposit takers, how will HMRC go about selection? Building societies have told us they are unable to partially freeze an account – does that mean HMRC will target only those institutions that can?
HMRC proposes to contact the debtor a minimum of four and a maximum of nine times by a variety of means before initiating the removal of funds. We would like confirmation that each of these communications will mention the possibility of forced and direct removal of funds. Other stakeholders have pointed out that the centralised postal system causes delays and lost post. 14 calendar days contact time is insufficient in any case – the taxpayer could be on holiday or in hospital. 28 business days is more appropriate. What actions will HMRC take to ensure that a taxpayer can contact officials without delay, 24/7 (many bank online only) and with the knowledge s/he is speaking to someone knowledgeable in authority? In instances where funds are taken from a bank account in error, how will the taxpayer be recompensed and how quickly?
Debtors are to be left with a minimum of £5,000 in each account accessed. We disagree with this one-size-fits-all approach. Different people have different needs at different times. Some may be able to manage on £5,000 – although that sum is arguably insufficient to fund a significant appeal – but many will not. Such an approach hits those unintentionally non-compliant debtors on reduced income but with some savings, such as widows, widowers and pensioners, disproportionately hard. In common with other vulnerable groups, some older customers are less able to deal with official communications – they may be targeted by HMRC, however, due to their higher than average savings.
HMRC states it will not increase overdrafts. But we understand those taxpayers who currently contact HMRC to arrange a time to pay are faced with a series of questions – including whether or not they have exhausted their overdraft or credit card limits. This seems unfair as those taxpayers who make the effort to pay are penalised this way.
Building societies are particularly concerned by the proposed treatment of joint accounts. They may be joint in name but not always in ownership. Even if deposit takers could determine easily who deposited what, they would still not know who owned what. We are greatly concerned about the privacy issues – HMRC/ deposit takers will not know which of the transactions of the past 12 months relate to the debtor. This means the non-debtor joint account holder has all his/ her personal transactions wrongly provided to HMRC.
Are all ISAs are in scope or just cash ISAs? The consultation refers to deposit takers and deposit accounts, so we assume stocks and shares ISAs are out of scope. But we would appreciate clarification, particularly as it is now possible to hold cash indefinitely in a stocks and shares ISA with no obligation to invest it.
As the BBA has also pointed out, if stocks and shares ISAs are in scope then this raises several questions, particularly around whether investments will need to be liquidated and around who decides what investments do and do not get sold. Also in cases of HMRC error, we assume HMRC will include any “missed” growth caused by stockmarket movement in the value of investments sold as well as “missed” dividends/ income when calculating the appropriate compensation amount to reinstate into the ISA. Indeed, in all cases of HMRC error we assume HMRC will include compensatory interest plus compensation for consequential losses arising from the customer not having the use of the money that would otherwise have been available.
The BSA believes for all the reasons set out above, the new powers should not be implemented, but nonetheless in the spirit of co-operation addresses the specific consultation questions as follows.
Q1 Is 12 months’ worth of account information sufficient for HMRC to establish how much the debtor needs to pay upcoming regular expenses?
Use of historic information is questionable as an indicator of future expenditure. More importantly, it raises questions about the confidentiality of the account holder’s spending details, particularly with joint accounts. We are not clear that HMRC has a legal right to see all personal data in a statement. Should the deposit taker be required to edit the statement it is then faced with higher costs and a lengthier process.
In cases of child maintenance deduction orders, three months’ worth of transactions is supplied. To our knowledge there has been no move from the Child Maintenance Service to increase this. We therefore consider three months to be sufficient.
Q2 Is 5 working days sufficient time for deposit takers to comply with account information requests?
No, it is not enough. Assembling and checking the necessary information is time and people intensive, particularly for those deposit takers with different centres and IT systems. Also, we have heard plenty of evidence that HMRC letters are often received a week after the date of issue. We note that under schedule 36 of the Finance Act 2008 deposit takers have 28 days with which to respond. For regulatory returns under COREP 30 working days is the default.
A minimum of 28 working days is therefore proposed.
Q3 By leaving a minimum balance in a debtor’s account, HMRC needs to strike a sensible balance between avoiding putting taxpayers into hardship and collecting money owed to the Government in an efficient manner. Is £5,000 a proportionate and appropriate sum to meet these objectives?
We disagree with this one-size-fits-all approach. Different people have different needs at different times. Some may be able to manage on £5,000 – although that sum is arguably insufficient to fund a significant appeal – but many will not. Such an approach hits those on reduced income but some savings, such as pensioners, disproportionately hard. As with other vulnerable groups, some pensioners are less able to deal with official communications – they may be targeted, however, due to their higher than average savings
Q4 What changes will deposit takers need to make to their systems to administer this policy and will this impose any administrative burdens?
Building societies (and banks) would have to make considerable and substantial changes to existing core and legacy systems to accommodate these new powers. Such changes cannot be implemented overnight; they have to join a queue of other such requested changes. As indicated earlier, the ability to partially freeze an account – so that a customer can continue to use the account while a portion has been sequestered - poses a particular problem as many societies are unable to do this. This is particularly pertinent where joint accounts and multiple accounts are concerned.
These changes will have to be made regardless of the size of the society, or volume of requests. Such steps hit the smaller societies hardest – they tend not to have the inhouse expertise and therefore rely on consultants, which are expensive. On top of these costs are those for staff training, not just to recognise and action requests, but how to deal with aggrieved, and occasionally abusive, customers. The costs are felt by all customers, not just debtors.
The consultation paper says that savings accounts are likely to be prioritised for recovering debt over day-to-day expense accounts. But we are not clear how HMRC envisages accounts to be ranked for freezing in and between building societies/ banks. Many savings accounts do not permit withdrawals at all; others do but with attached penalties.
As stated earlier, the position on stocks and shares ISAs is not clear. The consultation paper suggests only cash ISAs are in scope.
Q5 Is 14 days an appropriate length of time for the debtor to object to HMRC or pay by other means?
No, this is not long enough. Other stakeholders have pointed out that the centralised postal system causes delays and lost post. 14 calendar days contact time is insufficient in any case – the taxpayer could be on holiday or in hospital. They could have moved home in which case the correspondence could easily take in excess of 14 days before it is returned to HMRC. 28 business days is more appropriate.
HMRC has not convinced us that it will be able to deal with affected customers fairly and in a timely manner. For example, there is no mention of a 24 hour dedicated helpline for debtors staffed by experts; many customers manage their accounts online so are likely to discover their account has been frozen outside traditional banking hours.
Q6 What would be a suitable time limit for the deposit taker to comply with an order to release funds, either to the debtor or to HMRC?
For the release of funds from one individual account, ten working days would be sufficient. But where multiple and/ or joint accounts, and high volume of requests, particularly for a smaller deposit taker, are concerned a longer period would be necessary.
Q7 What sort of sanction should fall on deposit takers who do not comply either with the initial notice to supply account information or the instruction to release the held amount to HMRC?
None. There are so many flaws in these proposed powers, particularly with the reliability and timeliness of HMRC’s information on debtors, that no deposit taker should be liable to a sanction.
Q8 Is protecting a proportion of the credit balances of joint accounts the best way to protect non-debtor account holders?
We have grave concerns about the process for recovering funds from joint accounts and the level of protection that proposals afford to the non-debtor joint account holders.
HMRC takes the view that “joint” means 50/50. Such accounts may be joint in name but not always in nature. Even if deposit takers could determine easily who deposited what, they would still not know who owned what. We are also troubled about the privacy implications – HMRC/ deposit takers will not always know which of the transactions of the past 12 months relate to the debtor. This means the non-debtor joint account holder has all his/ her personal transactions wrongly provided to HMRC.
We would appreciate confirmation that deposit takers are able to provide full details to HMRC of a joint account involving non-debtors, and to freeze a joint account under the Human Rights Act.
Under the child maintenance deduction order scheme, joint accounts are not ordinarily targeted; neither are accounts used for business purposes. Regular deduction orders are only made against business accounts used by sole traders if there is no other suitable account to use.
HMRC needs to clear about the powers in relation to third party accounts such as solicitors' client accounts.
Q9 Are these safeguards appropriate and proportionate?
We do not agree with this proposed new power or consider that there are adequate safeguards. HMRC already has the power to directly recover tax and tax credits from bank accounts; it needs a court order, however. The existing civil remedies are indeed better than these new powers.
Our concern on the lack of robust safeguards relate to: the lack of independent judicial scrutiny; the lack of an independent appeals process; HMRC’s propensity and track record for making errors; and the de facto reinstatement of crown preference.
But perhaps the greatest flaw in this consultation is HMRC reliance on the ability of building societies’ and banks’ Type 17 and 18 returns to provide evidence of available funds – returns that can be up to two years out of date.
Members and associates may find more information on our policy brief.
23 July 2014
 Suggested at meeting with HMRC and industry, 25 May 2011