HMRC Debt Collection Powers: What They Can Do and How to Respond
Introduction
Running a business means managing tax as well as customers and staff. If tax goes unpaid, HMRC will act.
In recent years, HMRC has strengthened its debt collection powers and invested in new staff and technology.
This means more small businesses face direct contact when debts arise. Understanding the process helps you stay prepared.
This guide explains what HMRC can do, what to expect, and how to respond calmly and effectively.
Why HMRC Debt Collection Powers Matter
HMRC’s role is to secure money owed to the government. Late payments affect public services and increase the tax gap.
The Autumn Budget 2024 confirmed extra funding for 1,800 debt management staff, including 600 new recruits.
HMRC expects to raise an additional £2 billion each year by 2029.
Small businesses should take this seriously, because greater resources mean stronger and faster follow up.
How HMRC Collects Unpaid Tax
HMRC uses different methods depending on the type of tax and amount outstanding.
Knowing these methods helps you understand what action may come next and how to prepare.
PAYE Code Adjustments
For small PAYE underpayments, HMRC often adjusts tax codes.
This approach applies when the shortfall is £2,999.99 or less.
The adjustment reduces your tax allowance for the following year so the shortfall is recovered gradually.
Always check the details of code changes against payroll records, because errors can occur during processing.
Checking Code Notices
Code notices arrive through your HMRC account or by post.
Read each notice carefully and confirm the tax years involved.
If the figures do not match your records, ask HMRC for clarification.
Keep evidence of payroll runs, bank statements, and correspondence in case you need to dispute the change.
Simple Assessments and Self Assessment
If a tax debt remains, HMRC can issue a simple assessment.
This notice sets out what they believe you owe and can bring you into Self Assessment.
From there, you may face reminders and calls, often from private debt collection agencies.
Responding to Assessments
Check the figures line by line against your bookkeeping records.
Compare with invoices, payroll data, and bank transactions.
If something looks wrong, dispute the assessment quickly and provide supporting evidence.
Ignoring the assessment only increases interest and penalties.
Time to Pay Arrangements
Where debt exists, HMRC can agree to a Time to Pay arrangement.
This allows you to spread payments over monthly instalments.
Interest continues, but penalties are avoided if the plan is agreed within 30 days of the due date.
A clear plan protects your cash flow while keeping HMRC on side.
Proposing a Plan
Prepare a simple cash flow showing expected income and outgoings.
Be realistic about what you can afford.
Explain seasonal changes if they affect your earnings.
HMRC prefers a proposal backed by numbers rather than vague promises.
Direct Recovery of Debts
Since 2015, HMRC can collect debts above £1,000 directly from bank accounts.
They must leave at least £5,000 across your accounts after recovery.
This applies to savings, ISAs, and even joint accounts.
Safeguards mean HMRC must give notice and consider essential living expenses before taking action.
Challenging Direct Recovery
If you receive a notice, check the figures carefully.
Request a breakdown of the debt and the years involved.
Provide evidence if the debt would cause financial hardship.
You can propose a Time to Pay arrangement as an alternative.
HMRC Enforcement Officers
If debts remain unpaid, HMRC may send enforcement officers.
Internal officers handle complex or high value cases, while external agencies deal with smaller debts.
Their job is to secure payment, either through agreements or asset seizure.
Controlled Goods Agreements
An officer may ask you to sign a Controlled Goods Agreement.
This gives you seven days to pay before assets are removed.
If payment is not made, items listed can be sold at auction.
Fees include £110 plus 7.5% of any debt over £1,500.
Limits on Enforcement Powers
Enforcement officers cannot arrest you or force eviction.
However, they can apply for a charging order over property.
This secures the debt and may allow a forced sale through the courts.
Engaging early usually prevents matters reaching this stage.
Company Directors and Personal Risk
Limited companies protect shareholders, but directors may face personal risk in some cases.
If a company dissolves while owing tax, HMRC can pursue directors for wrongful trading.
Fraud or misuse of company funds increases the chance of personal liability.
Protecting Yourself as a Director
Maintain clear records of board decisions and cash flow.
Avoid paying dividends if profits do not exist.
Take advice when trading conditions worsen.
Strong governance reduces the risk of HMRC action against you personally.
The Scale of the Tax Gap
HMRC’s Measuring Tax Gaps 2025 report revealed that 94.7% of tax due was collected in 2023/24.
That equalled £829.2 billion out of £876 billion owed.
The remaining 5.3%—worth £46.8 billion—went unpaid.
Closing this gap is a key HMRC priority, which explains the increased focus on debt recovery.
Practical Tips for Businesses
There are steps you can take to avoid problems and handle HMRC contact with confidence.
Keep Accurate Records
Digital accounting systems reduce errors and help track obligations.
They provide quick access to figures when HMRC queries your accounts.
At I Hate Numbers, we always recommend using cloud tools for speed and accuracy.
Insurance and Security
Professional indemnity insurance provides cover if disputes arise.
Cybersecurity also matters when dealing with HMRC online.
Use strong passwords, two-factor authentication, and avoid public Wi-Fi when accessing your HMRC account.
Manage Customers Safely
Cash flow issues often lead to tax debt.
Protect your position by checking customers before offering credit.
Request deposits, use written contracts, and chase invoices promptly.
A stable client base reduces the chance of falling behind with HMRC.
Engage Early with HMRC
If you cannot pay, contact HMRC immediately.
Time to Pay arrangements are easier to agree before enforcement begins.
Delays only increase pressure and limit your options.
Frequently Asked Questions
Can HMRC take money without going to court?
Yes, but safeguards apply and you receive notice.
Can HMRC send bailiffs for small debts?
Yes, but most cases settle before enforcement.
Does Time to Pay affect credit ratings?
No, HMRC does not report to agencies, but missed payments can create wider issues.
How long can I spread payments?
It depends on affordability and compliance history, but early engagement improves options.
Final Thoughts
HMRC debt collection powers are wide-ranging but manageable with preparation.
Good records, early contact, and secure business practices reduce risks.
At I Hate Numbers, we help you simplify tax and protect your business.
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