Profession calls for safeguards as HMRC guns for court costs

It might come as a surprise to learn that the taxman can’t claim costs when it starts a county court battle to recover debts.

To April 2010, HM Revenue & Customs lodged 10,905 cases against those who had failed to pay the tax they owed, but now wants an overhaul of the system to tack on court costs from April 2011.

Advisers and business groups are largely behind the move, but have demanded that safeguards are included.

The Institute of Directors, the Civil Court Users Association, Chartered Institute of Taxation, Professional Contractors Group, the ICAEW and the Federation of Small Businesses are just a handful of those who have contributed to the debate in consultations.

The primary concern among the bodies is that the changes will not heap court costs on debts held by people genuinely unable to pay.

“It would not be appropriate for HMRC to be awarded costs where the taxpayer is in hardship or for tax credit overpayments,” respondents said.

Avenues for redress would need to be established in the case of mistakes.

Business groups and advisers also called for the additional costs HMRC can claim to be fairly minimal – enough to cover those costs reasonably and genuinely incurred during the process of lodging the claim, but with the exclusion of any HMRC wage costs.

A warning was also issued against charging a percentage of the sum being contested and basing the scale on the amount of work done to secure the victory.

For example, a percentage of the sum claimed, even if the charge were only 0.5%, on a tax claim for £1m would lead to costs of £5,000.

Advisers also flagged up the difficulties in calculating and accounting for small sums, as this placed an additional administrative burden on all involved.

Some costs are already covered by the state but there is no similar right to costs for the taxpayer.

All of the issues raised could discourage taxpayers who feel they have a genuine grievance and wish to defend an HMRC court action, the business groups said.

The taxman responded that it was not trying to push people further into debt, but only recover what was due from those with the funds to pay it.

“Court action is a last resort for HMRC,” the taxman said.

“It is in no sense a matter of routine and HMRC does not knowingly take people to court where it is satisfied that they are unable to pay.”

But the taxman also warned some people prefer to take a gamble and wait to see if HMRC will take them to court, because they know they won’t have to shoulder the burden of HMRC’s costs if they lose.

“In practice it is cheaper, for the defaulting taxpayer, to be sued by HMRC than by other creditors,” the taxman added.

“As a delaying tactic, others deliberately wait to be taken to county court before paying, knowing they only face the court fees. Some debtors see these as further reasons to leave tax debts unpaid.”

The taxman also said the imbalance also disadvantages people who paid what they owed compared to those who hold out.

The move is also being taken to smooth out an uneven playing field.

In England, Wales and Northern Ireland, HMRC cannot claim costs because the person presenting the case is usually a staffer, not a qualified solicitor.

But in Scotland HMRC employees can claim up to two thirds of the expenses which a solicitor might claim.

However, their entitlement to two thirds is not mandatory and various circumstances such as the nature of the case, time, earnings lost and complexity have to be considered.

HMRC intends to continue discussions with the Ministry of Justice and others to see how this should be implemented.