Select Committee on Public Accounts Forty-Ninth Report

1 Speeding up the recovery of debt

1. The Inland Revenue collected £219 billion in tax and National Insurance contributions in 2002-03 from 30 million taxpayers ranging from individuals to multi-national corporations. Most people and businesses pay their taxes on time but many thousands get into arrears because of financial difficulties or because they are unwilling to pay. The level of debt fluctuates throughout the year because the statutory deadlines for paying different taxes vary.[2]

2. At the end of March 2003 taxpayers owed the Inland Revenue around £14 billion and the Department estimated that around £12 billion was outstanding at the end of March 2004. Some of this debt had only recently become due and would be paid off quickly following automatic demand letters without any further action by the Department. But at the end of 2002-03 around £4 billion on PAYE, self-assessed Income Tax and Corporation Tax was more than one year old (Figure 1). The Department estimated that at the end of 2003-04 around £3 billion of debt was over one year old. It does not have data on the level of debt over one year old for other taxes and national insurance contributions.[3]

3. If a debt remains unpaid after an initial reminder, the Department's Telephone Centre attempts to contact the taxpayer to negotiate settlement. Cases which are not settled are passed to one of 143 local offices for recovery action. Where they are not successful the Department may instigate procedures to wind up a company, bankrupt an individual, or write off a debt it cannot recover. The Department wrote off tax debts of £523 million in the year to October 2002 and a further £275 million in National Insurance contributions in the year to the end of March 2003.[4]

Reducing the amount of debt over one year old

4. Of the £3 billion of debt over one year old at the end of March 2004:

Tracing taxpayers

5. Around £300 million of debt was over one year old because the Department was trying to trace taxpayers, for whom it did not have up to date contact details. The Department wrote off debts of £55 million in 2002 because it could not trace the individuals concerned, an increase of over 70% on the previous year. In many cases the Department did not have up to date telephone numbers or addresses because the information had never been provided or contact details had changed. Although the Department asks for contact details on tax returns it is not a legal requirement to provide them, nor are taxpayers required to notify changes of address.[6]

6. Around a quarter of all self-assessed Income Tax cases are passed to the Telephone Centre without a telephone number. In 2003 the Telephone Centre traced the telephone numbers of 22% of such cases. The Department improved its performance in tracing by enabling staff to search across its various computer systems for contact details. For cases which were easier to trace the Department had also used a specialist company which had been cost effective, and it is now making routine use of the private sector in tracing telephone numbers. The Department has concentrated on making full use of its own information systems, but has made little use of information held by other departments. It can however exchange information with a number of other departments, and intends to make better use of these arrangements to trace taxpayers.[7]

Pursuing recovery action

7. The longer a debt remains outstanding the more difficult it is to collect, so it is important to get people to pay as quickly as possible. The National Audit Office's modelling showed that on self-assessed Income Tax, the Department cleared only 59% of debt cases within 90 days, well below typical debt clearance rates in the utilities sector of 90% within 90 days (Figure 2), even though taxpayers have 10 months' notice of when a tax bill is due to be settled. The modelling showed that peaks in the debts on self-assessed Income Tax built up during September, January and March which took up to 10 weeks to clear. Reducing these peaks could save around £2 million a year by reducing the level of debt that becomes over one year old, part of which would eventually be written off.[8]

8. To reduce the level of debt over one year old, the Department received additional funding under the "Spend to Save" initiative in the 2003 Budget for an extra 75 staff to bring in £85 million a year in tax revenue by 2007-08. The Department believes it is on course to meet this target, having recovered £20 million in 2003-04 against a target of £11 million.[9]

9. The Department could make better use of its Telephone Centre. The Centre had been set up in 1999 to obtain outstanding tax returns and collect most debts on PAYE, and it now also deals with Corporation Tax and debts below £5,000 on self-assessed Income Tax. A review in 2002 confirmed that the Telephone Centre reduced the costs of servicing debt compared with other methods.[10]

10. To help speed up the collection of debt, large volume lenders in the private sector used four or five debt collection agencies and monitored the performance of each agent and their in-house collection service according to the type and age of debt. The Internal Revenue Service in the United States also plans to outsource to commercial debt collection agencies the collection of $13 billion in tax debt which would allow staff to focus on the more complex, higher value cases. The Inland Revenue in the United Kingdom has not outsourced the collection of debt because of taxpayer confidentiality and data protection implications.[11]

11. The Department employs around 5,000 staff at a cost of £92 million a year in local recovery offices which take enforcement action on debts where initial recovery action has been unsuccessful. This can involve seizing assets or court proceedings. The number of enforcement actions increased from 155,000 in 2001-02 to 181,000 in 2002-03. In the private sector there is a trend away from court action because of the costs involved. As an alternative they aim to maintain long term relations with the customer by trying to detect early those experiencing trouble paying their debts and negotiating repayment solutions such as rescheduling debt or suspending interest. Overseas tax authorities use a range of other practices to recover debt which could provide useful alternatives for the Inland Revenue to pursue instead of court action (Figure 3). [12]Figure 3: Practices used by other tax authorities to recover debts
Denmark - Withholding of salary

A local authority can ask a debtor's employer to withhold part of the debtor's salary each month and pay it over to the Tax Authority. In the UK an Attachment of Earnings Order is needed from the courts.

Norway - Distraint on bank or credit card accounts

The Tax Authority can distrain on the account set up by the business to handle customers' credit card transactions. It is mainly used where businesses have few tangible assets and high daily takings, such as restaurants. All of the business's takings from transactions using that company's credit card over the period of the agreement are paid over directly to the Authority.

Republic of Ireland - Recovery of debt through a third party

A third party, such as a bank, holds funds on behalf of the debtor. Where a debtor will not pay his taxes the Tax Authority can obtain these funds directly from the third party without going through the courts. In the UK the Inland Revenue can seek a Third Party Debt Order for the same purpose but they can only obtain this by going to the County Court.

Source: C&AG's Report Figure 12, page 21

Action on debts owed by insolvent companies or individuals

12. Around £1.2 billion of the debt over one year old is owed by insolvent companies or individuals and sums are written off each year because the debt cannot be recovered, amounting to £337 million in 2002. The Enterprise Act 2002 removed the Crown's preferential rights in insolvency debts to ensure that unsecured creditors were major beneficiaries of monies available for distribution from liquidated companies. This meant that the Inland Revenue was no longer automatically paid before other creditors. The change in status put a premium on early identification of cases at risk and prompt action to avoid escalating debts.[13]

13. The Department is looking to improve its performance by identifying businesses at risk early on and working with them to see whether it could help them with their financial difficulties. It received additional funding under the "Spend to Save" initiative in the 2003 Budget to improve debt recovery in cases under threat of insolvency with the aim of raising around £50 million a year at the end of three years. The Department was encouraged by early results, having collected £6.4 million compared with £5 million expected in the first year.[14]

14. Other tax authorities have powers which the Revenue does not currently have which help in reducing losses from companies going insolvent by requiring them to inform the tax authority as soon as they are unable to pay their tax and to hold their equivalent of PAYE in a separate bank account. In Denmark, the Central Customs and Tax Administration can also demand security from companies, such as bank guarantees, to provide cover for future tax debts. In the UK HM Customs and Excise can also require financial security from companies when registering for VAT.[15]

2   C&AG's Report, para 1 Back

3   ibid, Executive Summary paras 1, 1.8; Qq 4, 143-144 Back

4   C&AG's Report, Executive Summary para 3 Back

5   Q 4 Back

6   C&AG's Report, Figure 14; Qq 4, 44-46, 197-200 Back

7   C&AG's Report, para 2.1; Qq 46-47, 82-85; Ev 23 Back

8   C&AG's Report, para 2.5; Qq 7, 99-100, 149-155 Back

9   C&AG's Report, para 1.8; Qq 41-42, 97 Back

10   C&AG's Report, paras 2.3-2.4; Qq 58-59 Back

11   C&AG's Report, paras 3.2-3.4; Q 18 Back

12   C&AG's Report, paras 3.2-3.5 Back

13   C&AG's Report, para 3.11and Figure 14; Q 4 Back

14   C&AG's Report, para 3.11; Qq 6, 12, 16, 66 Back

15   C&AG's Report, para 3.12, Case Study F; Qq 9-15, 111  Back

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