HMRC changes its approach to managing taxpayer debts

HMRC played a key role in government measures to limit the economic damage caused by the pandemic. It implemented and rolled out the coronavirus job retention scheme (CJRS) and self-employment income support scheme (SEISS) to help businesses and the self-employed. HMRC also allowed taxpayers to defer the payment of PAYE, VAT and self-assessment tax liabilities, to assist taxpayers suffering from the economic impact of the lockdowns.

Although the CJRS and SEISS have now been withdrawn, HMRC’s latest accounts reveal that it is continuing to support businesses and individuals recovering from the impact of the pandemic as well as the disruption to global supply chains and the cost of living crisis. For example, during the year ended 31 March 2022, the number of ‘time to pay’ agreements (which allows tax debts to be repaid via instalments over an agreed period) in place between HMRC and taxpayers increased. Pre-pandemic, HMRC’s tax debt, which is defined as taxes that have become due for payment and are not under appeal, was on average 2.4% of tax revenues. The tax debt at the end of March 2022 was £39.2 billion which equates to 5.4% of tax revenues.

HMRC resumed their debt enforcement actions during the year ended 31 March 2022, which included taking insolvency action and using debt collection agencies, which had been paused during the pandemic. HMRC has received £62 million to help fund the recruitment of 500 additional debt management staff to enable HMRC to meet the demand from businesses and individuals for instalment arrangements.

Despite returning to business as usual, HMRC had forecasted that tax debt levels would remain at around 5% during the year ended 31 March 2023 and would continue to be above pre-pandemic levels in the long term. HMRC also expects that its losses from writing off debt will increase in the coming years, as more businesses fail due to the decline in global trading conditions.

These forecasts were made before the Bank of England’s report downgrading its outlook for the UK economy and predicting the economy will enter recession in the final quarter of the year, which it expects to last for five consecutive quarters. Therefore, future tax debt levels may be higher than HMRC anticipates.

Part of the increase in debt will be anticipated following the introduction of new measures. In May 2021, HMRC also implemented the first stage of the government’s Debt Respite Scheme (DRS), the ‘breathing space’ scheme for eligible individuals with qualifying debt, which includes tax debts.

There are two types of breathing space schemes. The standard breathing space scheme provides individuals with up to 60 days legal protection from action by creditors, such as HMRC, whilst they obtain professional advice to attempt to find a solution to their debt issues. The mental health crisis breathing space scheme is available for individuals that are receiving mental health crisis treatment certified by an approved mental health professional. They are protected from action by HMRC and any other creditors for the duration of their treatment and a further 30 days.

HMRC has confirmed that it is expecting to implement the second stage of the DRS, the statutory debt repayment plan, in 2024, under which eligible individuals may be able to repay their tax debt over a three-to-ten-year period, depending on their circumstances.

It’s clear the impact of the pandemic on HMRC’s debt levels has been substantial and it could get worse before it gets better.