HMRC have the power to issue notices requiring security from taxpayers who have failed to pay certain taxes on time. The main taxes covered are VAT, PAYE, National Insurance Contributions (NICs), Corporation Tax, and CIS deductions. 

A Notice of Requirement to provide security (NOR) is a formal demand from HMRC requiring the taxpayer to provide a specified amount of security (usually a cash deposit or bond) by a certain date. Failure to comply is a criminal offence which can lead to prosecution.

HMRC typically issue NORs where there is a history of late payment or non-payment of taxes. The purpose is to protect future tax revenue and incentivize compliance. HMRC may require security covering a period of 4-6 months of tax payments plus the current arrears. For example, if 6 months of VAT payments were owed, HMRC could demand 12 months of VAT payments upfront as security.

Once security has been provided, it will usually be held by HMRC for up to 2 years for PAYE/NICs and 12-24 months for VAT. Security can be returned earlier if HMRC feels the risk of future default has passed.

Appealing a Notice of Requirement: Taxpayers have the right to appeal an NOR within 30 days of issue. There is a two-stage appeals process:

• Stage 1: Formal notice of appeal sent to HMRC explaining why their decision is wrong. HMRC will review and either uphold, amend or cancel the NOR. 
• Stage 2: If the taxpayer still disagrees, they can request an internal HMRC review. If this does not resolve matters, the taxpayer can appeal to the First-tier Tax Tribunal. Further appeals are possible to the Upper Tribunal and higher courts.

There are various grounds on which an NOR can potentially be appealed or amended:

• HMRC failed to properly investigate before issuing the NOR 
• The NOR was issued to an inappropriate person, e.g. a director not responsible for previous company failures
• The company has a reasonable excuse for previous late payment/non-payment
• The new company has a strong payment history showing the NOR is unreasonable
• HMRC’s calculation of required security is wrong 

The Tribunal has the power to confirm, vary (e.g. reduce the amount), or cancel the NOR.

Consequences of Not Paying the NOR

It is a criminal offence for the taxpayer to continue making taxable supplies after receiving an NOR without providing the full security amount. HMRC can prosecute via the Crown Prosecution Service with magistrates’ court penalties:

• PAYE/NICs: Fine up to £5,000
• VAT/other duties: Fine up to £5,000 per taxable supply

The company directors can be prosecuted personally. Fines would result and potentially a criminal conviction with consequences for credit rating, travel visas, employment etc.

A Case Study

This case study is an appeal by D-Media Communications against a NOR issued by HMRC requiring security of £147,135 for unpaid PAYE/NICs. D-Media had built up PAYE and NIC arrears of over £100,000 during 2014/15. HMRC decided to issue an NOR requiring 24 months of security to incentivize compliance. 

D-Media appealed to the First-tier Tribunal, arguing HMRC had failed to properly investigate their circumstances before imposing the NOR.

The Tribunal found several flaws in HMRC’s decision-making process and allowed the appeal, reducing the security required to just £25,000.

Analysis of the Case Facts

The background facts of this case appear to support HMRC’s initial decision to issue some form of NOR:

• Arrears of £111,367 had accrued over a significant period indicating a systemic issue in D-Media’s accounting or cash flow.
• D-Media had continued filing RTI returns without paying the amounts due, exacerbating the debt. 
• No payments had been made at all in over 6 months. This implies an extreme cashflow issue or reluctance to prioritize tax liabilities.

Given this context, it was arguably reasonable for HMRC to seek security over future liabilities via an NOR. Requiring 24 months of security seems disproportionate, but seeking 6-12 months appears a cautious and fair approach in light of the mounting arrears.

However, the Tribunal identified that HMRC had failed to adequately investigate D-Media’s circumstances and form a holistic view of the actual risks:

• No analysis of accounts, cashflow forecasts or business plans to assess ability to pay future liabilities
• No attempts to engage with D-Media and understand their financial difficulties
• No exploration of options such as time-to-pay arrangements as an alternative to security

Essentially, HMRC had taken a somewhat “blanket” approach in issuing a substantial NOR without assessing the individual situation of the company. Imposing such a significant burden on the business without due consideration of their circumstances rendered HMRC’s decision procedurally flawed.

The Tribunal therefore decided that only £25,000 of security was appropriate here. This still provided revenue protection for HMRC but was evidently more proportionate and tailored to D-Media’s capabilities.

Wider Lessons from this Case

This case exemplifies the importance of taxpayers appealing NORs where they consider HMRC’s decision to be unreasonable or unjustified. HMRC does not always exercise its NOR powers judiciously or proportionately.

It demonstrates that the Tribunal will expect HMRC to have engaged properly with the taxpayer, investigated their circumstances, and considered alternatives before imposing such a potentially detrimental notice. Failing to do so renders the NOR susceptible to appeal, even where arrears exist.

The case also shows that HMRC’s calculation of the appropriate security amount should be scrutinized. The Tribunal clearly signalled here that 24 months of security was disproportionate and punitive based on the facts. Appellants can argue that the sum demanded exceeds their means and what is required to reasonably protect revenue. 

Finally, the case emphasizes that taxpayers should provide strong evidence around their finances, business forecasts, and proposals for paying arrears. This will help demonstrate to the Tribunal that a smaller amount of security is adequate and fair. Thorough financial disclosure enables the merits of the appeal to be properly evaluated.

How this Taxpayer Could Have Avoided the NOR Situation  

This situation could potentially have been avoided or mitigated had the taxpayer been more proactive:

• Prioritizing tax payments: PAYE/NICs should have been paid before filing further RTI returns. Allowing arrears to accumulate to £111k indicates a failure to give tax liabilities sufficient priority.
• Seeking time to pay: If cashflow issues were genuine, an agreed time-to-pay arrangement should have been requested from HMRC to clear arrears over a reasonable timeframe. This would have demonstrated a commitment to paying.
• Improving accounting processes: The systemic nature of the arrears implies some deficiency in cashflow forecasting and financial controls. Tighter accounting procedures were needed.
• Pre-emptive engagement: Earlier engagement and negotiation with HMRC around the emerging arrears may have forestalled the NOR or reduced the amount eventually demanded.
• Payment plan proposal: A comprehensive payment schedule for clearing arrears could have been presented to HMRC along with financial information to evidence its feasibility. This constructive approach may have satisfied HMRC’s desire for security.
• Seeking tax advice: Consulting a tax advisor or accountant for guidance on dealing with HMRC arrears would have been prudent. Specialist advice could have helped avoid a NOR from the outset.

Essentially, this situation arose from inadequate business financial management and an apparent disinclination to prioritize tax liabilities or engage openly with HMRC. Acting more decisively to tackle issues could have negated the need for HMRC to intervene with such a disruptive and penal notice of requirement.

Conclusion and Opinions: HMRC was entitled to issue some form of NOR here, given the scale of arrears accrued over an extended period. However, they failed to properly investigate D-Media’s circumstances before imposing an unreasonable 24 months of security payments. 

The taxpayer was, therefore, right to appeal the NOR. The Tribunal reached a fair compromise in requiring just £25,000 of security based on the facts and evidence presented. This still provided HMRC with satisfactory revenue protection without unduly burdening the business.

This case demonstrates that taxpayers should proactively engage with HMRC over emerging arrears and have sensible payment plans ready to propose. Where HMRC does issue unreasonable NORs without due consideration, specialist tax appeals advice should be sought immediately. With the right legal representation and evidence, NORs can often be reduced or even cancelled entirely.

For tax resolution or compliance, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.