ICAS responds to proposals to require payment of VAT and PAYE by Direct Debit

We have responded to government proposals to require businesses pay their Pay As You Earn (PAYE) and Value Added Tax (VAT) liabilities by Direct Debit. We highlighted some of the challenges that would arise and suggested possible incentives for encouraging voluntary adoption of Direct Debit.

In an earlier article, we considered the details of the proposals to require payment of PAYE and VAT liabilities by Direct Debit.  

Our response to the consultation doesn’t support mandating payment by Direct Debit now. Currently, most businesses prefer to use other payment methods accepted by HMRC, often for good reasons. The consultation wanted to know about any barriers or challenges businesses might face in making payments by Direct Debit, as well as any benefits. Our response provided detailed answers to the consultation questions - key points are outlined below.

Barriers and challenges 

Businesses want to retain control over the timing and amounts of payments. Allowing HMRC to take payments by Direct Debit is perceived as too risky by many businesses because of concerns about HMRC errors and the length of time it can take HMRC to rectify any problems. If HMRC took a large (incorrect) Direct Debit payment this could cause serious cash flow problems for many businesses and in extreme cases could cause a smaller business to fail.

We received extensive feedback about issues with HMRC systems and processes that deter businesses from using Direct Debit. There were significant concerns about problems with both VAT accounts and PAYE accounts, with unexplained errors and businesses unable to reconcile amounts. Issues were also reported with HMRC attempting to set payments against liabilities that weren’t due (for example, penalties under appeal). 

Larger businesses wanted to retain the ability to make payments from different bank accounts – and maintain approval controls for large payments. Smaller businesses also wanted to be able to use money from different sources to make payments to HMRC. All businesses wanted to be able to manage cash flow and control when and how they paid their liabilities.

Benefits

We received a limited amount of feedback about the benefits of paying by Direct Debit. Businesses which had chosen not to pay by this method didn’t consider that any benefits would outweigh the risks and challenges. 

The main potential benefits of paying by Direct Debit were perceived to be:

• Reduced risk of errors, for example, a business recording the wrong amount when setting up the bank transfer or using an incorrect reference.
• Reduced likelihood of missed or late payments. 

Sanctions and incentives

We didn’t support the introduction of penalties for failing to pay by Direct Debit, if the government decides to implement the proposals.

Businesses should be able to choose the method of payment that works best for their circumstances. If a business is making payments on time, it shouldn’t matter to HMRC how it chooses to do this. Imposing penalties wouldn’t be reasonable or proportionate, particularly where the amount due has been paid in full and on time. There are already penalties (and interest) to deter late payment. 

However, we did see some scope for HMRC to encourage more businesses to adopt payment by Direct Debit voluntarily. HMRC would need to address the issues that currently lead to businesses choosing to pay by other means and improve its communications abut Direct Debit payments. It would also need to implement a robust ‘fast-track’ process for correcting any HMRC errors. 

One incentive that could be introduced – for smaller businesses - would be to allow them to pay in instalments if they adopted payment by Direct Debit. We understand that setting aside funds to make one big payment can be difficult, so the ability to pay VAT over, say, two or three months, or PAYE weekly/fortnightly might make Direct Debit payments attractive and assist with financial management. HMRC itself recognises that spreading payments may be helpful, in the proposals set out in the consultation on Timely Payments for income tax self assessment, which refer to “smooth[ing] payments across the year.”

Another potential incentive – but this would involve a cost to the Exchequer – would be to offer a ‘discount’ of a (small) percentage of the tax due, for payments by Direct Debit. Businesses incur costs collecting and administering VAT and PAYE on behalf of HMRC, so this might be attractive, but if businesses which already pay by Direct Debit are excluded, it would obviously be perceived as unfair. In view of the cost, it could be time-limited and restricted to smaller businesses (or a cap on the amount of the discount could be imposed).  

If payment by Direct Debit is mandated, there will be some businesses (particularly larger ones, and those in VAT groups), which will find it very difficult to pay by this method. There will need to be some exclusions, for example, for those making payments above £20m. We recommended that the government should also allow some businesses to opt out of paying by Direct Debit – and to pay by other (electronic) methods. There could be conditions attached to opting out, for example, it could be restricted to businesses with a good payment record over a specified period. Businesses could be excluded if they are within the penalty regime for late payment.

Let us know what you think

We respond to tax consultations and calls for evidence and attend meetings with HMRC at which service levels, delays and other issues you raise with us are discussed. We welcome input from members to inform our work; email us to share your insights and feedback.