The amount HMRC spends annually on private sector debt collectors has increased by 630% in the last four years, and Kate Upcraft sees a strong connection with the introduction of RTI.
Value for money?
Research published by UHY Hacker Young shows an alarming rise in taxpayers’ money spent by HMRC on private sector debt collection since the introduction of RTI in 2013. In the year 2014, HMRC paid out £6.2m to private sector debt collectors; in 2017 the cost of debt collection paid by HMRC was £39.1m.
HMRC may claim that this is value for money and that the cost of debt collection is a necessary part of its role to close the tax gap. However, the tax gap is a vague figure which only HMRC can quantify, and there is no accurate analysis on which to justify a spend of £39m to collect the supposed total of outstanding tax debts.
What is the true tax debt?
HMRC itself made the startling admission in the RTI post-implementation review that the vast majority of tax debts they looked at in ‘closed cases’ never existed in the first place. This is what HMRC admitted in December 2017: “Analysis of a sample of closed cases showed that, on average, 78% of the outstanding debt was spurious”.
If that is the case, on whose authority was HMRC allowed to increase its spend on private sector debt collectors? HMRC’s position as a non-ministerial department designed to preserve impartiality in the tax system leaves only the NAO (National Audit Office) and the PAC (Public Accounts Committee) to challenge its operational decisions on a value for money basis.
Tales from the front line
Every week when I’m lecturing I’m regaled with stories from employers and tax agents who have had aggressive encounters with debt collectors. These private sector debt collectors often have no background paperwork to justify their enforcement action, just a figure from HMRC to collect. If they are not paid they will threaten to take goods to the value of the alleged debt.
Commenting on the research Mark Giddens, head of UHY Hacker Young, said: “Private sector debt collectors have been accused in the past of taking a gloves-off approach. Some say that using private collectors is the wrong way to chase tax debtors, especially as many can’t – rather than won’t – pay their debts.”
Giddens continued: “HMRC is under increasingly heavy pressure to ramp up their tax take but must do its utmost to see that the public are not unnecessarily pestered.”
Debt collectors arriving at a business premise can cause massive reputational damage and unchargeable time for agents, not to mention worry for employers. If the problem is allowed to fester, incorrect winding-up orders may also be generated from the same corrupted RTI data which gave rise to the incorrect tax debt.
What is the root cause?
The tax gap is one of HMRC’s key performance indicators. So surely there should have been some root-cause analysis of the accuracy of tax debt which makes up a large part of the tax gap? The senior management of HMRC needs to address these points:
The core RTI database is at times unable to distinguish if the RTI data submitted by employers and tax agents represents a new or existing employment.
In at least 200,000 cases per year (0.5% of employee population - per RTI implementation review) the RTI database duplicates the employment, incorrectly inflating the employer’s liabilities.
HMRC’s payments' system acts unpredictably in allocating payments to the wrong period, year, or even to the wrong employer.
Misallocated payments lead to an incorrect perception of non-compliance, as non-existent tax debts are created.
The net result of these errors is:
The employer is totally compliant with its PAYE obligations.
HMRC debt management staff see figures of tax debt that are incorrect, but they are unaware of the errors, although their PAYE colleagues know the RTI data can’t be relied upon.
The debt management team brief the private sector debt collector to collect a debt that doesn’t exist and pay the debt collectors to do this.