HMRC has upped its spending on debt-collection agencies chasing up unpaid tax bills to £39m in 2017, an indication that a crackdown may be underway.
More than 11 million people are required to submit a self-assessment tax return and pay their bill themselves. But outstanding tax can also result from incorrectly calculated income tax on your salary or any income you’ve earned but haven’t disclosed.
Which? looks at how HMRC recoups unpaid tax and how you can avoid an outstanding balance on your record.
HMRC debt collection spending up 62%
In 2017, HMRC spend £39.1m on private debt collectors – an increase of more than 60% on the previous year.
This continues a longstanding trend. In 2014, just £6.2m was spent on private debt collectors. This doubled in 2015, then again in 2016, when the total came to £24.1m.
In the same period, the ‘tax gap’ – the difference between tax due and that collected by HMRC – also decreased.
The tax gap stood at 6.4% in 2013-14. By 2015-16 (the most recent available), this had dropped to a record low of 6%.
- Find out more: Income tax – everything you need to know
How to avoid owing a tax debt
You may think there’s no scenario where you’d end up owing a tax bill. But often debts are the result of mistakes or misunderstandings.
The 2015-16 tax gap analysis estimated that £6.1bn was owed in unpaid tax due to ‘failure to take reasonable care’ and a further £3.3bn due to ‘error’.
It may be entirely outside your control. For example, if your employer provides the wrong information to HMRC, and you end up paying too little through PAYE.
Below, we explain our top tips for avoiding an unexpected tax bill.
- Check your tax code. When you recieve your pay slip or P60, check your current tax code and work out what it means – our guide to understanding your tax code can help. If it’s wrong, talk to your employer or pensions provider as soon as possible to make sure you’re paying the right amount.
- Keep your documentation. Having the right documents to hand will minimise mistakes when submitting your self-assessment, and help you check your PAYE. You need to keep self-assessment documents for at least 22 months after the end of the tax year, and HMRC investigations can go back up to six years (or 20 if it suspects deliberate error).
- Track your undisclosed income. If you earn income outside of employment, you may still need to pay tax on it, so make sure you understand your obligations. Not all income is taxed, for example, if tax-free allowances are available – there are various rules about what you need to tell HMRC.
- Speak up about underpayment. A smaller-than-expected tax bill may seem like a windfall. But if HMRC later picks up an error, you’ll be on the hook to pay it back, even if it wasn’t your fault. If your bill seems surprisingly small, double-check to make sure it’s right.
- Beware tax-avoidance schemes. There are legitimate ways to minimise your tax liabilities. But some of these schemes are actually scams, while others may be skirting the line of legality. You could face a hefty bill, or penalty, if you end up on the wrong side of HMRC. Seek qualified professional advice on any tax-avoidance scheme and be skeptical if it sounds too good to be true.
Find out more: How to reduce your tax bill
How does HMRC use debt collectors?
If you fail to pay your tax bill, HMRC may ask a debt-collection agency to pursue the outstanding sum.
Generally speaking, the agency will write to you requesting that you pay the bill, then follow up with you if you don’t.
There are 12 agencies that HMRC works with; you can see the full list on its website.
How to avoid a HMRC scam
If you receive an email, letter or phone call demanding immediate payment of an outstanding tax bill, don’t pay straightaway as scammers often use HMRC as a cover to rip people off.
As a first step, call HMRC yourself to check whether there are debts owing. If someone has called you out of the blue, and you want to ring HMRC yourself to check the call is legitimate, first hang up, wait 10 minutes, then call the number listed on the HMRC website.
Should a debt collector claiming to be from HMRC show up at your door, always ask to see their photo ID. You can then ring the HMRC helpline on 0300 200 3862 and quote the ID number so that HMRC can confirm if the person is authorised.
- Find out more: How to spot a tax scam
How HMRC collects debts
Aside from debt collectors, HMRC has other methods of clawing back tax.
If you pay through PAYE, HMRC may change your tax code so that more is withheld from your earnings or pension.
If you earn less than £30,000, HMRC can take up to £3,000 a year, which steadily increases the more you earn, up to £17,000 for those earning more than £90,000.
HMRC can also take money directly from your bank or building society account, but only if you:
- have repeatedly refused to pay
- have been visited face-to-face to discuss the debt
- would still have at least £5,000 in your account.
In extreme cases, HMRC can take control of goods you own and sell them unless you pay your bill within seven days. You may also face court action in the Magistrates or County court.
What if you can’t pay?
Don’t panic if you’re facing a tax bill that you can’t afford to repay.
Your first step should be to contact HMRC. In many cases, they’ll be able to offer you more time or arrange for you to pay by instalments.
The longer you leave it, the more you’ll owe in interest and penalties, so it’s worth acting as soon as you can.
Find out more: Late tax returns and penalties for mistakes