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Taxman wants to swipe money direct from bank accounts

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Taxman wants to swipe money direct from bank accounts
Published on Sunday, September 23, 2007 / Source: MSN Money

You might think the taxman already has enough clout, but things could be about to get worse - a lot worse.
HM Revenue & Customs (HMRC) wants to extend its powers so it would be able to raid bank and building society accounts for unpaid tax, without having to make its case before a judge and obtain a court order. Your home could also be at risk: HMRC could put a charge on your property if you didn't pay your tax, again without seeking sanction from a court.

HMRC believes the changes would give it the "right tools to tackle debt". Many experts think they go too far and would turn the taxman into judge, jury and executioner. Mike Warburton, senior tax partner at accountancy firm Grant Thornton, said: "It's a disgrace. If HMRC has a claim, then it should stand up in court. I would rather put my faith in the independent judiciary than the taxman. We are not yet living in a police state."

Tax collection under review

The proposals are part of a wider review of HMRC's methods of tax and debt collection. It wants to make it easier for taxpayers to pay their tax on time, so is considering flexible payment arrangements, perhaps allowing people to pay their tax by monthly instalments. It might also in future allow people to settle their tax bill with a credit card.

It's fairly harmless stuff and will probably make life easier for the taxpayer. But then you come to the crunch - debt collection.

The latest figures show we are in debt to the taxman to the tune of 22 billion. It's a lot of money, but it's only 5% of total tax receipts, so it's not a big percentage. Most of the debt is also short term, so it might eventually be collected.

"Most people pay their tax, grumpily or otherwise. But there is a small minority of people who are persistently unwilling to pay up," said John Whiting, tax partner at Price Waterhouse Coopers.

Targeting tax-dodgers

Determined debtors are undoubtedly annoying, but I'm not sure that justifies a raid on their bank accounts. Surely the taxman could make better use of its existing - and extensive - powers.

Powers such as the automatic penalty for failure to file your tax return on time. You also rack up interest on unpaid tax - and the rate is 8.5%. That's a lot more than the 4% interest on any tax you are owed by the taxman.

HMRC argues the penalties and surcharges are not always enough. But its powers don't stop there. If you don't pay the tax you owe, HMRC can apply for a court order to get the money, either from your bank account or with a charge on your assets. In other words, it has to abide by the same rules as any other creditor.

Neil Tipping, senior consultant at tax and accounting information group CCH, criticised the proposed extension of HMRC's powers. "It would effectively give HMRC the power to recover tax it believes it is owed much faster than it can at present," he said.

And that's dangerous because the burden of proof would be shifted. It would be up to taxpayers to prove their innocence, rather than HMRC to establish their guilt.

Taxman gets it wrong

Sadly, the taxman is often guilty of getting it wrong. The National Audit Office recently criticised HMRC for errors in the PAYE system. It estimates that 5 million out of 30 million people are paying the wrong amount of tax.

Imagine if the taxman raided your bank account, leaving you with no funds, hefty bank charges and a poor credit rating - and it was all a mistake. Imagine then having to prove your case and get the money back from an adversary that is backed by the government and has bottomless pockets. It doesn't sound very fair, does it?

HMRC seems pretty determined to push through the proposals. It cites examples of other countries where official bank raids are legal. In Australia and France, for example, the tax authorities can grab money from your bank account or pay packet.

Backing for the new plans

Some experts respect the rationale. Whiting said: "If you owe and have the money, then HMRC should be able to take it. It's not really much different from PAYE, where your tax is taken directly from your pay packet. It just sounds more alarming."

But Whiting insisted there must be safeguards. "I would have to be certain that the taxpayer owed the money and that HMRC had made every effort to collect it before it was allowed to dip into your bank account."

HMRC also talks about safeguards. "HMRC supports those who wish to pay but find themselves temporarily unable to do so, but it is then only fair that it pursues the small minority who delay payment for a significant time so that they do not gain an advantage over the compliant," a spokesman said.

"The ideas would only apply to established tax debts once all the normal avenues for appeal had been exhausted, and after repeated requests for payment had been ignored. The consultation itself seeks views on the appropriate safeguards to protect taxpayers."

But then safeguards already exist in the current system in the form of an independent judge. And who would you rather trust?