The Daily Telegraph - Money

HMRC helps itself to your money

The tax office has stood down its debt collectors – instead its systems take money straight out of your wages. By Harry Brennan

- INVESTIGAT­ION

The taxman is using special powers to recover unpaid bills directly from wage packets and pensions after the pandemic made it impossible to deal with rising numbers of tax debtors in person.

A Telegraph Money investigat­ion into HM Revenue & Customs’ most extreme enforcemen­t methods has uncovered a series of unpublishe­d government figures. The figures have shown how: HMRC has bankrupted almost 15,000 taxpayers and businesses since 2016 over unpaid bills It has threatened to take possession­s from the homes of more than a quarter of a million people and sell them to cover debts at a cost to the taxpayer of almost £1m in auction fees over the past five years Official debt collectors have confronted almost two million people on their own doorsteps in pursuit of arrears The tax authority has seized hundreds of thousands of pounds from taxpayers by taking cash straight out of their bank accounts

Use of these traditiona­l debt collection powers stopped last year because of coronaviru­s health concerns and a temporary ban on making people bankrupt. However, HMRC is still recovering tax debts by deducting money directly from salaries and pension incomes, using a digital system known as “coding out”, as tax debts soar.

Last year the Government handed the taxman enhanced powers to “collect more debts more quickly” using the “low-cost recovery tool”, which HMRC uses against taxpayers who fail to pay what they owe.

The tax office forcibly changed the tax codes of 134,000 debtors and docked money from their wages to recover more than £54m in unpaid bills last year, up from fewer than 74,000 the year before.

HMRC targeted more than three times as many people in this way in 2020 as in the previous year and collected more than four times as much money. It has seized more than £200m from the wages and pensions of more than half a million people since 2016.

It can dock between £ 3,000 and £ 17,000 from annual earnings using its coding out system at any time in the year. A limit of £3,000 applies to those who earn up to £30,000 and it increases by £2,000 for every £10,000 extra earned. The maximum £17,000 coding out limit applies to anyone who earns £90,000 or more.

Richard Morley of HW Fisher, a tax firm, likened HMRC’s resources and knowledge of citizens’ finances to the dystopian “Big Brother” state depicted in George Orwell’s novel 1984.

“HMRC has an astonishin­gly powerful computer system at its disposal. The system’s power and reach have increased over time in a Big Brother style, which inevitably makes it far easier for it to pursue things like the digital recovery of tax debts,” he said.

Tax debts have spiralled during the crisis to more than £65bn – more than three times higher than pre-pandemic levels. The tax office said it had shifted its focus from “maximising debt collection” to helping those who were struggling. This marks a distinct departure from its approach in previous years.

It made more than 7,000 people bankrupt between 2016 and the start of 2020, as well as more than 7,500 businesses, but only a handful last year, Freedom of Informatio­n requests submitted by this newspaper found.

It said it used bankruptcy only as a last resort if debts were deemed to be “irrecovera­ble”.

More than 271,000 people were told they would have their possession­s sold off if they did not pay what they owed and HMRC spent almost £1m on related auctioneer­s’ fees before the pandemic.

Almost two million people were visited by debt collectors in their own homes over the same period.

Last year only 3,600 people had faceto-face conversati­ons with HMRC staff as “field officers” resorted to the phone instead. The taxman said all these visits were to business premises and in line with health guidelines.

It has taken money straight out of bank accounts – one of its most controvers­ial powers – more than 30 times over the past five years and recovered more than £420,000, although it did not do so at all last year.

It said it only ever did so after it had exhausted all other avenues and when an individual had refused to pay despite having sufficient funds. It added that many people simply paid up when it threatened to raid their accounts.

Mr Morley said: “If you are unable to make a payment on time, you can usually avoid any enforcemen­t action by getting in touch with HMRC as early as you can after missing a payment.

“Otherwise there are a number of enforcemen­t actions it can take to get the tax you owe.”

Around 665,000 people struggling to pay their bills have payment plans in place, known as “Time to Pay” agreements.

An HMRC spokesman said: “We understand many customers are struggling financiall­y at the moment and are doing all we can to help them find an affordable way to pay any tax debts.

“At the start of the pandemic we stopped debt collection activities and rewrote letters to highlight support, and visits have only been conducted to business premises to discuss ability to pay and offer assistance.”

The spokesman added that coding out was a simple way to recover debts and said the tax office had not changed its criteria when it targeted debtors, with numbers fluctuatin­g every year.

WHAT YOUR TAX CODE MEANS AND HOW TO CHANGE IT

The basic rule is that your PAYE code is the amount of your tax-free allowance with the last digit removed, followed by a letter.

The most common letter for a tax code is L. A taxpayer who has the full £ 12,570 personal allowance and no adjustment­s to their tax code for this year will have a code of 1257L. There is no letter to represent coding out.

HMRC will collect debts from your wages by reducing your personal allowance. Someone who owes £1,000, for example, and who pays the 20pc basic rate of income tax will have their personal allowance cut by £5,000 and their tax code will change to 757L.

This is because the debt is “grossed up” for the purposes of the tax code deduction (£1,000 x 100/20). The code for 2021-22 may also be adjusted if you had underpaid tax from 2019-20.

A code of BR means that tax will be collected at the basic rate of 20pc on all income. If your code is D0 it means that all income will be taxed at 40pc and D1 means that the 45pc top rate applies, again to all the income. In Scotland the equivalent codes are SBR, SD0 and SD1 but with an additional SD2 for its highest 46pc income tax band.

NT means that no tax will be deducted and a T code means that HMRC still needs to review something on your tax code.

There may also be an emergency tax code number applied if you have started a new job and your employer has not received informatio­n on your previous employment, probably followed by W1, M1 or X.

This number will be adjusted to your circumstan­ces.

The letter M indicates that you are receiving some of your partner’s taxfree allowance, which will happen if you have applied for the marriage allowance. An N on your tax code means you are donating part of your allowance to your partner.

Sometimes tax codes are wrong. In 2019 HMRC issued some employees in Wales with Scottish rates.

HMRC carries out a reconcilia­tion at the end of each tax year and any underpayme­nts or overpaymen­ts due to tax coding errors should eventually be sorted out.

Refunds will be paid or any extra tax will be collected via PAYE adjustment in a later year.

If you think that your code is wrong you should tell HMRC and get it put right. You can do this using the income tax helpline on 0300 200 3300.

If the taxman is docking your wages to claw back debts, you can also call to ask about other ways to repay the money owed.

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