Taxman treads a fine line on debt

As the recession deepens MPs are asking whether HM Revenue & Customs is doing enough to help struggling businesses that are falling behind on their taxes.

Lesley Strathie, the recently appointed chief executive officer of HMRC, says that the department is striking a balance between being sympathetic towards smaller businesses who are being hit by the economic downturn, while also maintaining the flow of tax revenue into the Treasury.

Last November the National Audit Office issued a report which estimated that the total number of tax debts rose by 22% to £15.8m from a year earlier.

The report also said it was concerned that HMRC does not have the resources to deal with the increase, having cut staff handling debt by 14% to 6200 since 2006.

More cuts are are planned. HMRC says that it plans to close two thirds of its tax debt offices, which will mean the closure of around 50 offices in the UK.

MPs worry that HMRC’s debt management staff will struggle to keep up with the predicted growth in tax debt as the economy worsens.

HMRC is currently consulting on its approach to manage tax debt and whether to adopt tougher sanctions on high-risk taxpayers.

Strathie, and other senior managers at HMRC, were last week questioned about tax debt by MPs on the Commons Committee of Public Accounts.

‘We’re trying to give people sufficient help so they’re not going out of business – it’s treading a careful line,’ Strathie told MPs. ‘We’re sympathetic when we believe it’s a short-term problem. We don’t want to push someone into premature liquidation if it can be avoided.’

HMRC is also trying to help struggling businesses through a new helpline. The Business Payment Support Service received nearly 28,800 calls from businesses struggling to pay their tax bills and granted 14,200 extensions to tax bill deadlines between 24 November and 4 January, including 2,700 over the Christmas period.

But there is still plenty of room for improvement over managing and collecting tax, say MPs, who are urging HMRC to focus on taxpayers’ most at risk of default.

MPs want the taxman to take a more ‘risk-based’ approach to tax debt. Under this approach taxpayers deemed higher risk would be subject to different sanctions, including tougher penalties for submitting tax payments late.

The Netherlands is one country where tax authorities have successfully adopted this approach, according to Edward Leigh, Conservative MP and chairman of the Committee of Public Accounts.

Strathie conceded that HMRC should have taken a risk-based approach to tax debt earlier, but said a decline in its debt management staff has hindered reforms.

‘The only thing we can change is the future… like any other department HMRC has to prioritise its resources,’ he said.