Are HMRC tax raid powers constitutional? Don’t bank on it.

Piggy Bank

New rules allowing the Revenue to raid taxpayers’ bank accounts without trial are impracticable, unfair and unconstitutional.

In this year’s Budget, the Chancellor announced plans to allow the tax authorities to raid people's bank accounts without a court order if the Revenue (HMRC) believed they owed more tax. People would only get their money back if they were able to prove that the money was not owed. The government consultation on implementing this measure ended last week. The policy has drawn criticism from across the political and vocational spectrum, with opponents including everyone from Liberty, the Human Rights group, to ICAEW, the body that represents chartered accountants.

Despite the government’s description of the policy as “Direct Recovery of Debt (DRD)”, the Revenue is fallible and in many cases it will not be legitimate tax debts that are directly recovered, but money that is not in fact owed. For example, through the Pay As You Earn (PAYE) system, 5.5m people paid the wrong amount of tax in 2013/14. Our tax system is extremely complicated for people who have more than one source of income (for example, if they do some self-employed work). There are inevitably some grey areas in which it is not clear whether the citizen is subject to a particular tax rate. George Osborne should stop and think before he implements this policy. It is impracticable, unfair, and quite possibly unconstitutional

The impracticability of DRD comes from the fact that it only applies to money sitting in bank accounts. If, after you’ve filed your tax return, the Revenue thinks that you owe more, it will be able to freeze your bank account and then extract the money it believes you owe. But if you have no money in your account, but have recently bought a more expensive house and are using all your extra money to pay the mortgage, the Revenue can’t seize your house. Therefore, anyone who is genuinely trying to dodge tax will just have to find ways of storing money outside of a regular bank account that the Revenue can’t target. Sadly, such steps are less likely to be taken by honest people who have made a genuine mistake about how much they owe, or who are correctly insisting that they owe less than the Revenue demands.

Unfairness between those who store their money in the bank and those who don’t is not the only inequity of the new rules. Even worse, the rules will hit vulnerable people the hardest. The people who will suffer are not big corporations that can afford lawyers to prove that their complex tax affairs are in order, but small businesses and middle earners. “If the debtor does not agree with the amount of tax that is due, they have a right to appeal to a Tribunal” is the rather specious claim of the government consultation paper. For people who can’t afford to pay tens of thousands of pounds to hire a specialist tax lawyer, this is simply theoretical nonsense. Once the money has been taken by the Revenue, it will be gone forever, even if the Tribunal would have decided that it wasn’t owed. Under the old rules, a taxpayer who didn’t agree with the Revenue’s claims about how much tax was owed could hold firm and refuse to pay. The Revenue would have to make a decision about whether its case for being owed the extra money was strong enough to be worth going to court over, or not. Putting the burden of proof on the taxpayer rather than the Revenue won’t harm big businesses with teams of lawyers on standby, but it will hurt the little guy.

Finally, the DRD plans are unconstitutional. The principle of natural justice means that no one should be a judge in his own cause. Here, in the context of a dispute between Revenue and taxpayer over how much tax is owed, the Revenue is being given the power to decide the dispute in its own favour by taking the money it claims to be owed. Worse still, the Revenue’s employees only justify their existence by collecting as much tax as possible, so they have a clear personal interest, from the perspective of their long term career prospects, in seizing money to which the Revenue’s claims may be dubious at best. Even where the right of appeal against the Revenue to a proper court or tribunal is used – and for those without deep pockets this right is theoretical rather than real – the Revenue will still have acted as claimant, judge and jury in the first stage of its own tax dispute. Moreover, as leading tax barrister Jonathan Schwarz has argued, circumventing the courts in this way is contrary to the principles of constitutional democracy, violating the separation of powers between the executive (in this case the Revenue) and the judiciary.

A cynic might suspect that the government is not too bothered if people end up paying too much tax as a result of the new rules. A boost to the exchequer would help to cut the deficit or finance vote-buying hand-outs. But for those who believe in fairness between taxpayers and constitutional government limited by the rule of law, any policy permitting the Revenue to raid our bank accounts is a threat to be resisted.