Can HMRC demand security for future tax payments?

HMRC powers

HMRC is charged with protecting the public revenue, and it has special powers in circumstances where it considers there is a significant risk that a taxpayer will fail to make a payment due. It can issue a Notice of Requirement (NOR) in respect of a wide range of taxes including VAT, PAYE (including NI), corporation tax and construction industry scheme payments. For a full list of the taxes covered, see the Securities Series list - but broadly it's incorporated businesses that are at risk.

Taxpayers must pay any amount demanded as security within 30 days for payroll taxes. For VAT, security is due “immediately”. But there should usually be a warning letter first. Plus, unless there are exceptional circumstances, there should be an agreed timeframe. HMRC says “we’ll allow what we consider to be a reasonable amount of time”.

What is a security?

A security is either a payment that will be held in a special account by HMRC, or the purchase of a performance bond. The exact amount depends on the tax the security is in respect of. For example, for PAYE it will be based on four months of liability. It will be six months for VAT in most cases, and twelve for corporation tax. This will be held for a fixed period then reviewed.

The security will not reduce any arrears, nor can it be used to offset any liability for the holding period. It is merely a hedge against non-payment.

Who is at risk?

Any business falling within the Securities Series range of taxes where HMRC thinks revenue is at risk. So if there is a poor payment or compliance history, especially where there is prior involvement with an insolvent business. For VAT, it could even be trading from premises earlier occupied by an (unconnected) insolvent business especially one in a similar line of trade.

Can the request be refused?

The consequences of non-compliance can be extremely serious. For VAT, failure to pay the security makes continuing to trade a criminal offence. For PAYE and NI, the employer and anyone receiving the NOR is liable to prosecution and a potentially unlimited fine. In the case of companies, this usually includes directors. If the business is struggling with cash flow due to the coronavirus, it might be worth an initial chat with the officer to see if the circumstances might be taken into consideration. This is more likely to succeed if compliance affairs are up to date and the business can demonstrate a commitment to keeping them as such. In such cases, an internal review should be requested.

If HMRC won’t budge, the only recourse is to the tax tribunal, though inability to pay is unlikely to garner much sympathy on its own. It's essential that there is no delay in making the application. Businesses should apply immediately following HMRC’s internal review, and within 30 days in all cases. The tribunals are increasingly clamping down on poor procedure, and may not accept a late appeal, even if it means severe consequences for the directors.