Tax debt continues to rise amid fears about HMRC powers

Overdue tax owed to HMRC had reached £44.7bn at the end of March, according to the latest official figures released in July, up from £44bn at the same time last year. This included new debt of £103,592m for the full year to the end of March, which is up on the £96,944m for last year’s figures at the same point. Resolved debt meanwhile has risen to £101,851m for the end of March this year, up from £96,738m cleared during the equivalent period for the previous year. In total, 884,319 customers were in Time to Pay arrangements at the end of March this year, down from 913,209 in the previous year, according to analysis of the figures by BDO. For 2024 to 2025, HMRC said its tax gap, the amount of money that should be paid to HMRC in tax and the amount that is actually paid, was at 6.4%. So, it is little surprise that HMRC has consulted on changing the rules about when tax is paid, including proposals to extend its existing powers to recover unpaid tax directly from a taxpayer’s bank account.

Is this likely to happen?

HMRC has consulted on proposals to extend these powers, but they have not yet become law. Whether the Government decides to introduce them will depend on the outcome of the consultation and any subsequent legislation. It’s concerned that allowing HMRC to recover lower-value debts directly from taxpayers’ bank accounts could lead to taking money in error and creating hardship as a result, if the safeguards aren’t sufficiently tight to eliminate such mistakes. These lower-value debts could be collected in greater volumes, and while the LITRG says it recognises “the importance of collecting tax that’s due”, it’s concerned that “some vulnerable taxpayers could be adversely affected if adequate protections are not built into the new process”, said Victoria Todd, Head of LITRG.  She added: “We understand why HMRC is looking for more effective ways to collect tax debts. However, the proposals raise some important questions about how taxpayers will be protected. “It is important that, before any action is taken to recover a debt directly, HMRC are satisfied that the debt has been correctly identified and is genuinely due.”

What safeguards are in place to prevent financial hardship?

This would be an extension of the existing Direct Recovery of Debts powers, which are currently used only where debts exceed £1,000 and even then, only in certain circumstances. These current powers have caveats which mean HMRC must leave at least £5,000 across the taxpayers’ accounts once any money has been taken. If these proposals are introduced, smaller tax debts of up to £5,000 for individuals or £10,000 for companies could be recovered directly from bank accounts monthly rather than as a single lump sum, and there is currently no specified minimum that must be left in the taxpayers’ accounts listed in the consultation. This could increase the risk of financial hardship for some taxpayers who are already living on a tight budget and struggling to meet essential living costs. Ms Todd said: “One of the key questions is how HMRC will assess what is affordable where a taxpayer has not engaged, or cannot engage with them. Without up-to-date information about an individual’s circumstances, there is a risk that deductions could be set at an unaffordable level. “HMRC will need to be confident that they can correctly identify potentially vulnerable taxpayers and distinguish them from those who are simply choosing not to engage. “We welcome HMRC’s recognition that strong safeguards and clear routes for taxpayers to challenge decisions will be essential.” Disclaimer This article is intended as general guidance only and is based on UK tax legislation, HMRC guidance and Government proposals available at the time of publication. Some of the measures discussed relate to proposed changes that are subject to consultation or future legislation and may change before they come into effect. The information provided does not constitute tax or legal advice, and you should seek professional advice based on your individual circumstances before taking any action.

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