Tax credits debt — imprisonment and taking control of goods
A long-form article looking at what could make tax credit debts a priority debt and how the FCA rules for debt advisers and Debt Advice Peer Assessment (DAPA) guidance require advisers to explain the consequences of not paying any particular type of debt.
Although we commonly refer to ‘priority’ and ‘non-priority’ debts (and will do in this article) it’s important to say neither DAPA or the FCA use these terms. It’s all about explaining consequences and the impact they’ll have on the client. One issue that has arisen recently is what makes tax credits overpayments a ‘priority.’ The position in the Child Poverty Action Group (CPAG) Debt Advice Handbook (12th edition) is that tax credits are a priority debt because HMRC can recover tax credit overpayments as though they are tax debts. This includes the following powers:
- HMRC can use bailiffs without a court order AND,
2. ultimately imprisonment for non-payment
I’d also add to the list:
3. HMRC can apply for a court warrant to use reasonable force to enter property, once they’ve decided to use bailiffs.
This article looks at these 3 issues in turn. Aside from these methods, HMRC can of course deduct from wages and ongoing tax credit awards. Nowadays they’re able to transfer debts to the DWP to collect as a benefit debt by deductions. These immediately decrease income so are serious consequences, but we’re not looking at those methods here.
The recovery methods under tax law
The Tax Credits Act 2002 (s.29) says that any tax credit overpayment can be recovered as a tax debt, as per part 6 of the Taxes Management Act 1970 (TMA 1970). The recovery notice from HMRC must say they intend to treat the debt as a tax debt.
If HMRC has decided to treat a tax credit overpayment as a tax debt, HMRC has a right to use:
- ’Distraint’ (s.61 of TMA 1970).
- Summary proceedings to recover as a civil debt in the Magistrate’s Court (s.65).
- County Court proceedings (s.66). This on it’s own is no big deal, but how they might enforce any CCJ is.
This article explains our understanding. We’ve also pointed out where we think the law is open to interpretation.
1) ‘Distraint’ is now ‘taking control of goods’
The Taxes Management Act 1970 still refers to the power as ‘distraint.’ Since 6 April 2014, this has been replaced in England and Wales with taking control of goods (see s.127 of The Finance Act 2008).
As per s.127, a Tax Credit debt is payable ‘by virtue of an enactment’ (the Tax Credits Act 2002). It is also payable to ‘the commissioner’ defined in s.139 of the Finance Act 2008 as HMRC. A ‘contract settlement’ is also defined in s.139 to include any arrangement to pay a debt owing to HMRC. So any outstanding tax credit debt falls under s.127 of the Finance Act 2008 and can be recovered by taking control of goods.
HMRC must use the taking control of goods procedure in schedule 12 of the Tribunal Courts and Enforcement Act 2007 (TCEA 2007). However, HMRC does not need a court order to use the process. HMRC can appoint its own officers to act as bailiffs under s.63 of the TCEA 2007.
The current position under DAPA is that being able to take control of goods without a court order must be explained to clients. HMRC can act quickly and there is no method of suspending the action.
Under para 20 of schedule 12 to the TCEA 2007 Act, and reg 28 The Taking Control of Goods 2013 regs, bailiffs can apply to court for a warrant to use reasonable force to enter property in certain circumstances. One of these circumstances is where the debt is due under s.127 of The Finance Act 2008. So it appears that HMRC can apply for a warrant to use reasonable force when enforcing tax credit debt. This is also reflected in HMRC’s own debt and banking guidance (see ‘entry under warrant’).
Other creditors can apply for a warrant to use reasonable force under the same piece of legislation. However, they have to show the court that they believe goods have been removed from one address to another to avoid them being taken. HMRC does not have to prove this — they can apply for a warrant simply because the debt is due under s.127 of The Finance Act 2008.
HMRC can apply for a warrant to use force as a matter of course. They do not have to prove goods have been removed from one address to another to avoid being taken control of. This is arguably another reason to prioritise a Tax Credit debt. Advisers must explain this power to clients.
2) Magistrates’ Court
The Taxes Management Act 1970 says Taxes (and therefore tax credits) can be enforced in the Magistrates’ Court as a civil debt. The rider to this is that the debt must be under £2000, and must be in respect of debt accrued in the last 12 months.
If this route is taken and the client is unable to pay, then the range of Magistrates’ Court powers are available to HMRC. However, HMRC’s guidance goes on to state that they will only enforce a Magistrates’ Court order by one of two methods relevant to this article:
- A distress warrant — so use of bailiffs and taking control of goods OR
- A judgment summons in the County Court. However, HMRC’s guidance on judgment summons (see below) implies they won’t use them for tax credit debts (but they might for other taxes)
The HMRC guidance doesn’t say that the magistrates’ order will be enforced by committal despite the Magistrates’ Courts Act 1980 allowing this. Under 76 and s.92 of the MCA 1980 a court can use committal where the debt being collected is listed in Schedule 4 of the Administration of Justice Act 1970 (tax credits are). The maximum term of imprisonment is six weeks under Schedule 4 of the Magistrates’ Courts Act 1980. HMRC can issue a complaint for non-payment under s.96 of the MCA 1980.
The power effectively mirrors the test for fines; that the client must have wilfully refused or culpably neglected to pay, as per McNulty v HMRC [2012] UKUT 174 (TCC) — see para 40.
The HMRC guidance suggests they’ll only consider enforcing their magistrates’ order by taking control of goods or a judgment summons. It’s silent on committal but adds that collectors must refer for guidance from the higher debt management officer. This only appears to follow an unsuccessful attempt at taking control of goods.
The law allows HMRC to imprison via the Magistrates’ Court for debt under £2000, accrued in the last year. However, their guidance is less clear whether they will take this route. Advisers must explain the option is available to HMRC.
3) County Court — Judgment Summons
The power to commit to prison for a tax credits debt via a ‘judgment summons’ is complicated. It arises under s.11 of The Administration of Justice Act 1970. This allows certain creditors to apply for a judgment summons once they’ve got a county court judgment or a Magistrates’ order for a civil debt. A judgment summons is available for certain types of debt under s.5 of The Debtors Act 1869. The types of debts include debts due under the Taxes Management Act 1970.
At a judgment summons hearing somebody who has the means but does not pay can be imprisoned if they refuse or have neglected to pay. The maximum term is 6 weeks in prison. If a client fails to attend the judgment summons hearing, they will be ordered to attend on a given date. If they fail to attend the adjourned hearing they can be arrested and brought to court. They could even be imprisoned for up to 14 days under s110 of the County Courts Act 1984 if they fail to attend any adjourned hearing.
However, and this is a big however, HMRC’s guidance goes on to say that tax credits overpayments should never lead to a judgment summons. If this was to happen HMRC would be in breach of its own guidance. The law allows it, but the guidance does not. This is why advisers do not report seeing cases.
The law allows HMRC to obtain a judgment summons which can lead to imprisonment. However, their guidance says they will not use this option for tax credit debt. Advisers should explain what HMRC’s guidance says.
Repeal of (some of) the Tax Credit Act 2002
There is a further complication. In January 2019, a large part of the Tax Credits Act 2002 was repealed. This included the part that allows Tax Credits to be recovered as tax debts. However under transitional arrangements, most tax credits debt that we see, can still fall under the Tax Credits Act 2002.
Tax Credits debt are now often collected as a benefit overpayment. Typically this involves deductions from wages or benefits, but not imprisonment or bailiffs without a court order. Article 4 of The Tax Credits (Exercise of Functions) Order 2014 allows HMRC to transfer debt to the DWP.
Therefore, HMRC has a choice. Treat the debt as a tax debt, transfer the debt to the DWP or use the more familiar collection options. In practice as this article flags up, HMRC is often using the DWP to recover the debt like a benefit overpayment.
Arguably once transferred to the DWP, the debt will be due to the DWP and not HMRC so s127 of the Finance Act 2008 doesn’t apply. This rules out bailiffs without a court order and warrants to use reasonable force to enter. Again arguably, once transferred the debt is not treated as due under the Taxes Management Act 1970. This would rule out the use of the Magistrates’ Courts and Judgment Summons. This is supported by the DWP Benefit Overpayment Recovery Guide which says at para 5.104, for ‘off benefit recovery’ that a migrated tax credit debt will be:
‘…recovered as if it were a benefit overpayment and the same off benefit rules apply.’
Summary
So in reality the sanctions that make tax credits more of a priority debt are seldom used. HMRC guidance appears to actively limit their use. More commonly they are now collected as though benefit debts, or via the more familiar methods. However, as the sanctions are available in law, advisers must explain the consequences and the impact that might have on the client as per DAPA guidance and FCA rules. Importantly, the DAPA scheme follows the Debt Advice Handbook which classifies tax credits overpayments as a priority debt for the reasons explained in this article.
Graham O’Malley is a Debt Expert in the Expert Advice Team at Citizens Advice.
