Direct Recovery Debt

Direct Recovery of Debt: What contractors need to know

3 August 2015

Amid controversy over the Summer Budget’s four-pronged attack on the contracting sector, a separate and potentially troublesome government crackdown has gone relatively unnoticed.

Contained in the 2015 Summer Finance Bill, the Direct Recovery of Debts (DRD) provision gives HMRC the power to seize funds from the bank accounts of errant taxpayers.

The measure is expected to affect around 11,000 “non-compliant” individuals (including self-employed professionals) and businesses every year, swelling government coffers to the tune of £420m by 2020.

HMRC says it will “only take action against debtors who owe over £1,000”, adding that a minimum aggregate of £5,000 will always be left across the target’s accounts. Other safeguards have been introduced after concerns were raised during consultation.

Outlining the case for DRD, the Revenue said: “This measure will contribute towards making the tax system fairer for those who pay what they owe on time.

“It will enable HMRC to recover debt directly from cash held in the bank and building society accounts, in credit, of debtors who have the means to pay but choose not to do so. This includes funds held in cash in ISAs.”

Delving into the legislation itself, the Bill states:

“Only debtors who have received a face-to-face visit, have not been identified as vulnerable, have sufficient money in their accounts and have still refused to settle their debts will be considered for debt recovery through DRD. Debtors affected by this policy will have 30 days to object before any money is transferred to HMRC and HMRC must always leave a minimum of £5,000 across a debtor's accounts above the amount that has been held. If debtors do not agree with HMRC’s decision, they will be able to appeal against this to a County Court on specified grounds, including hardship and third party rights.”

Chris Jones, president of the Chartered Institute of Taxation (CIOT), welcomed the introduction of additional safeguards, adding that it’s right that HMRC is subject to the rule of law.  

So what does all of this mean for contractors operating through their own limited company?

Neil Armitage, operations director here at Umbrella Accountants, believes contractors who utilise the services of a compliant, knowledgeable accountancy firm should have little to worry about.

“Those in the process of setting up as a limited company contractor may have little prior experience of keeping their tax affairs in order”, he said.

“This new measure underlines the importance of turning to a specialist contractor accountant who will ensure you stay up to date with your tax obligations, thereby keeping HMRC happy.”

Call us today on 0800 121 6513 for more information on Direct Recovery of Debts (DRD) and other new legislation affecting contractors and freelancers.