In a move that signals a renewed emphasis on tax enforcement, HM Revenue & Customs (HMRC) has restarted the use of its Direct Recovery of Debts (DRD) powers. These powers allow HMRC, under certain conditions, to recover tax debts directly from individuals’ and businesses’ bank accounts, including building society accounts and cash ISAs.
The measure was originally introduced by the Finance (No. 2) Act 2015, giving HMRC the authority to access funds directly where tax debts have remained unpaid despite repeated contact. The regime was paused during the COVID-19 pandemic to reflect the exceptional financial pressures faced by taxpayers, but HMRC has now confirmed its return in a “test and learn” phase. This development marks a significant escalation in HMRC’s approach to recovering outstanding tax, particularly as the government faces growing concerns about the size of the UK’s tax debt and compliance gap.
Why HMRC is Restarting Direct Recovery
HMRC’s decision to restart DRD is driven by a combination of fiscal and behavioural considerations. The agency has long argued that DRD serves as a valuable deterrent, encouraging taxpayers to engage and settle their liabilities before enforcement action is necessary. In recent years, the total amount of tax owed to HMRC has grown substantially, reflecting the economic aftershocks of the pandemic and the cost-of-living crisis. While around 90% of all tax is paid on time, the remaining 10% still represents billions of pounds in unpaid revenue.
The government’s broader strategy involves strengthening HMRC’s debt management operations and ensuring that those with the means to pay do so. HMRC has been clear that DRD will target individuals and businesses who have the ability to meet their obligations but have chosen not to. According to the Institute of Chartered Accountants in England and Wales (ICAEW), the department intends to use the measure sparingly and in tightly controlled circumstances, particularly where repeated attempts at contact have failed.
How the Process Works
The Direct Recovery of Debts process follows a defined and multi-stage procedure. It is not intended to be used as a first resort but rather as a last measure when all other attempts at engagement have been exhausted.
First, HMRC must establish that the taxpayer owes at least £1,000 and has sufficient funds available in their bank or building society accounts to cover the debt. Before any action is taken, HMRC will have issued multiple notices demanding payment and provided opportunities for the taxpayer to contact them or arrange a Time to Pay agreement. Only when these efforts fail will DRD be considered.
If HMRC decides to proceed, an officer will conduct an in-person visit to the taxpayer’s home or business premises to confirm details and verify that the individual is not considered vulnerable. This step acts as an important safeguard, as DRD cannot be applied where a taxpayer is deemed vulnerable due to financial hardship, illness or personal circumstances.
Following the visit, HMRC may issue a Hold Notice to the taxpayer’s bank or building society, temporarily freezing funds in the account. The taxpayer then has a 30-day window in which to object to the action or provide evidence that the debt is disputed or the recovery would cause hardship. During this time, the funds remain frozen but are not transferred. If the objection is upheld, the hold is lifted; if not, HMRC can issue a Deduction Notice instructing the bank to transfer the funds directly to HMRC.
Importantly, HMRC must leave at least £5,000 in the account after recovery to ensure the taxpayer retains access to essential living or business funds. This threshold applies across all accounts held in the individual’s name and is intended to mitigate the risk of leaving someone without means to meet basic expenses.
The Implications for Businesses and Individuals
The restart of DRD is likely to have a significant psychological and operational impact on taxpayers. For compliant individuals and businesses that file and pay on time, the measure will make little practical difference. However, for those who have fallen behind on their obligations or ignored HMRC correspondence, the consequences could be severe.
For businesses in particular, the ability of HMRC to remove funds directly from a bank account could present immediate cash-flow challenges. Even with the £5,000 safeguard, a deduction at the wrong time, such as before payroll or supplier payments, could disrupt operations and damage relationships. It is therefore vital that companies keep their tax affairs up to date, respond promptly to any HMRC communications, and seek professional advice if they encounter financial difficulty.
For individuals, the key takeaway is that ignoring HMRC correspondence is now riskier than ever. Those who cannot pay in full should contact HMRC as early as possible to discuss payment arrangements. Engaging early almost always prevents escalation to DRD, as HMRC is generally willing to negotiate structured repayment plans when approached in good faith.
Areas of Concern
Despite the safeguards in place, the reintroduction of DRD raises several legitimate concerns.
One of the most significant relates to the identification of vulnerable taxpayers. HMRC has stated that it will not apply DRD to vulnerable individuals, but determining vulnerability is not always straightforward. There is a risk that some people facing genuine hardship could be incorrectly assessed as non-vulnerable and have funds removed unfairly.
Another concern involves the accuracy of the debt itself. Although DRD can only be used where a debt is final and no appeal is pending, disputes do occur over the correctness of assessments or the amount owed. Errors in HMRC’s records, while uncommon, can and do happen. If funds are deducted incorrectly, the process of reversal may be slow and stressful, particularly for those already in financial distress.
For businesses, cash-flow disruption is a real issue. Even where a company has sufficient funds overall, removing a lump sum from an operating account could jeopardise its ability to pay employees or suppliers. The safeguard of leaving £5,000 untouched may be adequate for an individual, but for many small businesses, it is far from sufficient.
Finally, there are broader questions of fairness and proportionality. Critics have argued that HMRC already possesses a range of enforcement options, including court orders, distraint and bankruptcy proceedings. The power to dip directly into a taxpayer’s account, even with safeguards, is seen by some as excessive and potentially undermining trust in the tax system.
Staying Compliant and Protecting Yourself
In light of these developments, the most effective protection for both individuals and businesses is proactive engagement. If you owe tax and are struggling to pay, contact HMRC or your adviser as soon as possible. Ignoring reminders or demands for payment is precisely the behaviour that may trigger DRD.
Maintaining accurate financial records, ensuring all returns are filed on time, and responding promptly to correspondence are also key. Businesses should review their cash-flow management processes and consider ring-fencing funds for tax liabilities to prevent unexpected account deductions.
If you receive notice of a Hold or Deduction from HMRC, it is essential to act immediately. Seek professional advice to determine whether the action is valid, whether the debt amount is correct, and whether you have grounds to object. Time is of the essence, as the objection window is limited.
How We Can Help
At Williamson & Croft, we assist individuals and businesses across the country with tax compliance, debt management, and negotiations with HMRC. Our experienced advisers can review your situation, verify whether HMRC’s actions are lawful, and help you reach affordable payment arrangements before enforcement occurs.
If you have received correspondence from HMRC regarding unpaid tax, are concerned about possible DRD action, or simply wish to ensure your tax affairs are fully compliant, we are here to help.
Contact us today to discuss your circumstances confidentially with one of our tax specialists.
We can provide practical advice, liaise directly with HMRC on your behalf, and give you peace of mind that your tax position is secure and under control.