HMRC are planning to introduce mandatory direct debits for VAT and PAYE liabilities, but is this really proportionate? Their proposal is intended to reduce late payments and administrative errors, but the question is whether such deductions are really needed, given the relatively modest scale of late payments. Also, have they really considered what the unintended consequences could be if this plan comes into force.
The consultation exercise I wrote about in my Blog of July 23rd, ‘HMRC can now raid your bank account’, is to quote Babb Dylan’s famous 1963 anthem. “The answer, my friend, is blowin’ in the wind”
HMRC’s consultation has now closed
We are now eagerly awaiting what HMRC’s response to the consultation is, but thusfar they have not said whether or not they are planning any changes to the original proposal. Their case for mandatory direct debit is straightforward, namely if tax is collected automatically, they believe that fewer businesses will miss payment deadlines, use incorrect payment references or fail to make payments altogether.
HMRC further argue that this should reduce tax debt, improve compliance and lower administrative costs for both taxpayers and HMRC. There is no doubt that, used in the right circumstances, direct debits can provide genuine benefits. However, the consultation raises a number of questions.
The key question is clearly, will forcing all businesses to use direct debit for PAYE and VAT liabilities, subject to certain exceptions, a proportionate solution? The consultation itself acknowledges that most taxpayers already pay the correct amounts on time using existing payment methods, of which direct debit is just one. Against that background, the case for forcing taxpayers to accept a mandatory DDM appears somewhat weak.
Loss of control
Excluding DDMs, using alternative payment methods, gives taxpayers control over whether and when payments are made. Under mandatory DDMs, that control effectively passes to HMRC. Direct debit works particularly well where there is a clear and predictable amount to collect. However, VAT and PAYE liabilities do not always fit neatly into this category.
For example, an employer may submit multiple Full Payment Submissions or Employer Payment Summaries, which can be further complicated when some employees periodically work abroad. This raises practical questions about how disputed liabilities, amended returns and payment corrections would be managed before the payment is automatically collected from a taxpayer’s bank account.
It is therefore easy to understand why a taxpayer may wish to retain control over making payments to HMRC. Businesses often operate with tight margins and the ability to control payment timing can therefore be an important aspect of cashflow management. Mandatory DDMs would remove much of that flexibility, especially so if a business experiences cashflow difficulties. In these circumstances, an automatic collection could have a number of negative effects, such as overdraft charges, difficulties paying suppliers or other cashflow pressures. In extreme cases it could also affect borrowing arrangements and credit ratings.
Accountants have expressed serious doubts on what effect this could have on Time-to-Pay arrangements. Businesses seeking temporary support with payments need confidence that agreed payment plans will override any scheduled direct debit collections. Currently it’s unclear whether there would always be sufficient time for a taxpayer to enter into a Time-to-Pay arrangement before a direct debit is collected.
Potential unintended consequences
Experience has taught me that taxpayers very rarely respond to HMRC Head Office policymakers’ planned operational changes exactly in the way HMRC expect. To retain control over their finances, especially cashflow, many businesses are likely to establish separate bank accounts specifically for HMRC collections, transferring funds to those accounts only as and when they are able to make a payment.
Other businesses may well consider delaying the submission of VAT or PAYE returns until sufficient funds are in their account available for collection. Neither outcome would support HMRC’s objective of improving compliance, and is therefore highly likely to have the opposite effect.
There is also a risk of creating unequal outcomes between taxpayers. Businesses using their main trading account could experience automatic collections during periods of cashflow pressure, while those that have restructured their banking arrangements (as outlined above) will retain greater control over the payment timing.
Accountant’s view
HMRC’s plan to eventually automatically collect all taxes by direct debit has all the signs of being drawn up on ‘the back of a fag packet’ by a couple of Treasury bigwigs after sharing a bottle of port. What seems like a good idea after a couple of ‘large ones’, has very rarely been fully thought through, especially with regard to the potential consequences.
Ultimately, HMRC’s planned switch to compulsory Direct Debits is fundamentally about power over taxpayers. This does not sit well with most businesses, who are already fed up with the tax office’s seemingly obsessive pursuit of control. The level of which would not be out of place on the pages of George .Orwell’s classic novels, Animal Farm and Nineteen Eighty-Four. These satirical, allegorical and dystopian novels appear to reflect HMRC’s current direction of travel, I regret to say.
