The start of the new tax year sees HM Revenue & Customs take on new powers.

The start of the new tax year – 6 April 2012 - sees HM Revenue & Customs (HMRC) take on new powers that enables it to ask employers to pay a security where there is a serious risk that they won’t pay over their PAYE deductions or Class 1 National Insurance Contributions (NICs).

HMRC has said that they will use this power "to target those employers who have a record of using bankruptcy and phoenixism" – this is where directors carry on the same business or trade successively though a series of two or more companies as a way of stepping away from their creditors, leaving debts unpaid with HMRC and legitimate suppliers. However, HMRC has said that it "will not use these powers where a business is having genuine financial difficulties".

The changes

Currently HMRC can ask for a security for VAT, insurance premium tax, or environmental taxes. HMRC say that in around half of cases, the employer becomes compliant after receiving their first warning letter.

John Davies, head of technical at ACCA, comments: "HMRC will require a security from selected businesses to enable them to trade. The security will probably be a cash deposit from the business or director to be held by HMRC, or it might be a bond that is payable on demand.

"We are advising businesses large and small to make sure they’re up to speed on this new development. The security required will vary from case to case, depending on the amount of tax at risk and the previous behaviour of the employer. Employers can appeal against HMRC’s decision. If the security isn’t provided, employers can be prosecuted by HMRC. However, the punishment would be a fine rather than a custodial sentence."

Who will this affect?

HMRC say that this will not have an effect on the ‘vast majority’ of employers who pay their tax on time and in full, nor will it affect employers who are having ‘genuine’ financial difficulties. Instead they are focusing on:

- Employers that deliberately choose not to pay PAYE or NICs;
- ‘Phoenix’ businesses that cease trading to avoid tax then begin again shortly after in a different guise; employers who build up large PAYE or NICs debts;
- And employers that ignore HMRC attempts to contact them

Davies concludes: "These should be HMRC’s "powers of last resort" after all the other avenues for taxpayers to get up to date with their payments have been exhausted. The powers will be a good thing if they are used to prevent rogue directors from setting up phoenix companies to defraud HMRC and other creditors.

"The one concern we have is that HMRC may find it hard to distinguish between directors who are deliberately taking money from employees’ wages and diverting it into their own pockets, and businesses which are in genuine financial difficulty and need help rather than sanction. It will therefore be important that HMRC satisfies businesses that it will use this new power only where it has strong grounds for suspecting that abuse is likely to occur."