A Notice of Requirement represents a powerful tool for HMRC to demand security from taxpayers perceived as non-compliant or at high insolvency risk. Receiving a NOR should be addressed. Urgent action is required to provide the requested security within the deadline or prepare a strong appeal against excessive demands. Failure to engage can allow HMRC to pursue charges, asset seizure, and insolvency procedures aggressively.

Seeking expert tax advice is critical when facing a NOR. With the correct strategy, taxpayers can often negotiate more reasonable security terms or withdraw the NOR if found disproportionate. 

What is an HMRC Notice of Requirement (NOR)?

A Notice of Requirement (NOR) is a formal notice issued by HMRC demanding taxpayers provide security for current or potential tax liability. It is done under the authority of the Finance Act 2009.

Reasons HMRC may issue a NOR

HMRC can issue a NOR if they believe there is a serious risk that the tax will not be paid. Situations where a NOR may be sent include:

• The taxpayer has a history of not paying taxes on time or failing to engage with HMRC.
• The taxpayer is undergoing insolvency procedures such as bankruptcy, liquidation or administration.
• The taxpayer is involved in tax avoidance schemes or offshore non-compliance.
• HMRC believes the taxpayer is at risk of becoming insolvent.
• The taxpayer is involved in an ongoing tax investigation or disputes with a potential large liability.
• The taxpayer has moved assets offshore beyond HMRC’s reach.

If HMRC feels the tax collection is at serious risk, they can use a NOR to protect the Exchequer. It is a powerful tool to secure assets and ensure payment.

What happens when you receive a NOR?

When a NOR is issued, the notice itself will specify:

• The amount of security HMRC is demanding. This will be HMRC’s estimate of the potential tax liability.
• The form of security HMRC requests – such as a cash deposit, letter of credit, guarantee or charge over assets.
• A deadline for providing the security – is usually 30 days from the issue date.
• The reasons why HMRC is demanding security and their justification.
• Details of the taxes the potential liabilities relate to.
• The appeal rights and process if the taxpayer wants to dispute the NOR.

It is imperative to act fast upon receiving a NOR. Missing the 30-day deadline can allow HMRC to take further action against you.

Providing security required by a NOR

The main forms of security HMRC can request under a NOR are:

Cash deposit – You deposit a sum specified in the NOR directly with HMRC. This gives them a cash sum to draw on if the liabilities crystallise. The cash acts as an upfront payment.

Bank letter of credit: Your bank provides a written commitment to pay HMRC a specified sum on your behalf if called upon. The bank guarantees the payment.

Third-party guarantee: Another party agrees to guarantee they will pay the sum specified in the NOR if you fail to pay the tax liabilities. HMRC can then seek payment from the guarantor.

Charge over assets: You agree to provide a mortgage, lien or charge over an asset of yours, such as property, land, inventory, etc. This gives HMRC recourse to seize and sell the asset to cover your tax liabilities.

The type of security HMRC requests will depend on your financial circumstances and what assets are available. They will ask for security in the form easiest for you to provide.

What happens if you don’t comply with a NOR?

Missing the 30-day deadline to provide security gives HMRC the power to take tougher collection measures, including:

• Issuing a Certificate of Pending Notices (CPN) certifies that you have failed to comply with the NOR. It is an enforcement precursor.
• Applying to the court for a Charging Order – This secures HMRC’s interest ahead of other creditors and allows them to enforce the sale of your property to recover tax debts.
• Forcing you into insolvency procedures if you cannot pay.
• Using CRCA powers to freeze assets or issue financial penalties.
• Prosecuting you for deliberately not complying with the NOR.

HMRC can escalate recovery through the debt collection stages, including seizing and selling your assets if necessary. Ignoring a NOR removes HMRC’s risk protection so that they will take action.

How to appeal a NOR

Taxpayers have the right to appeal a NOR within 30 days of it being issued. If you wish to challenge the NOR, you can appeal to HMRC, setting out your grounds for contesting it.

Possible grounds for appeal include:

• The amount of security demanded exceeds the realistic tax liabilities.
• HMRC’s risk assessment is flawed or unreasonable.
• You dispute the calculation basis of the potential liabilities.
• Paying the security would cause serious financial hardship.
• Your circumstances have changed since the NOR was issued, reducing the risk.

If HMRC rejects the appeal, you can apply for an internal review of the decision. Further appeals can eventually be brought to a tax tribunal.

You should seek professional tax advice if looking to contest a NOR. The appeal process is complex, and you will need evidence to support your position. It is advisable to provide the requested security while disputing the NOR. If your appeal is accepted, HMRC will return any overpaid security.

When can security be reduced or released?

If your financial circumstances change significantly after providing NOR security, you can apply to HMRC for the security to be varied, reduced or cancelled.

This is done through a voluntary variation application, demonstrating why the original level of security is no longer necessary. Examples include:

• The potential liabilities have now been calculated at a lower amount.
• You have paid some of the disputed tax, reducing the outstanding risk.
• Providing ongoing security is causing you financial difficulties.
• HMRC agreed to suspend collection on hardship grounds.
• Your finances show you can now pay the liabilities.

HMRC will consider adjusting or discharging the security if it is satisfied that the original risk assessment is no longer applicable and security is now excessive.

Equally, if the outstanding tax liabilities increase, HMRC may issue a further NOR to demand additional security. It is important to proactively manage your NOR as your financial circumstances change.

Using business asset security in NOR cases

Where a NOR is issued to a company or corporate taxpayer, the security will generally need to come from business assets. HMRC cannot force directors or shareholders to personally guarantee company tax liabilities under a NOR.

Typical business assets used for security include:

• Company property: providing a charge over land, buildings, fixtures, etc.
• Stock and inventory: a floating charge over stock that can be realised.
• Accounts receivable: assigning outstanding debts or accounts owed to the company.
• Intellectual property: charging patents, trademarks, copyright etc.
• Plant and machinery: a charge over fixed assets like equipment or vehicles.

The assets should provide enough security to cover the NOR amount with some margin. The asset value should exceed the potential liabilities.

Business charges usually require director consent along with legal documentation. HMRC will register the charges to ensure their priority over other creditors. Using business assets allows companies to comply with a NOR without directors having to inject personal funds.

However, it does place HMRC as a secured creditor. They can enforce the sale of company assets if the tax is not subsequently paid when due. Seeking tax advice is essential before using business chargers for NOR security.

Impact of insolvency procedures on NORs

If a taxpayer subject to a NOR enters formal insolvency like administration or liquidation, the treatment of NOR security can become complex:

• The insolvency officeholder has to formally set aside enough funds to meet the NOR security amount. These funds cannot be distributed to other creditors.
• HMRC will still expect the security to be provided from company assets in a liquidation scenario.
• In an administration, the administrator may seek a new arrangement with HMRC over security as part of the rescue procedures.
• If HMRC issues a CPN due to non-compliance under a NOR post-insolvency, the insolvency rules take precedence. CPN enforcement is usually suspended.
• For personal bankruptcies, the NOR obligation remains with the bankrupt individual, not the trustee handling their assets.

Insolvency affects HMRC’s risk position, so they may be willing to reconsider the NOR. Insolvent taxpayers should seek professional restructuring advice to address any NOR complications.

Using NOR security payments for other tax debts

Suppose a taxpayer has provided NOR security, and the tax liabilities the NOR relates to are later settled. In that case, the taxpayer cannot automatically obtain a refund of unused security funds.

HMRC may agree to:

• Offset the surplus against other taxes the taxpayer owes, which is undisputed.
• Retain the funds on account for future liabilities expected to arise.
• Refund a portion of the security if it materially exceeds the remaining liabilities.

HMRC will not return security solely because the liabilities DROP meant to cover have been cleared. But they should apply it against other debts before seeking additional NOR security.

Taxpayers should keep communicating with HMRC if they believe surplus NOR security should be reduced or refunded in their case. As with any disputed tax, professional advice helps navigate the complex rules of using NOR payments.

Is HMRC misusing NOR powers?

Some concerns have been raised that HMRC has been overusing NORs as a revenue collection tactic in recent years. Revenues & Customs Brief published statistics showing a steep rise in NOR use:

• In 2020-21, over 15,000 NORs were issued, raising £4.6 billion in security.
• This has increased fivefold from just over 3,000 NORs in 2016-17.

Critics argue that HMRC’s risk assessment process needs to be revised. NORs are being sent routinely in minor tax disputes with low non-payment risk.

HMRC maintains that NORs are only used in compliance with the statute and where risk thresholds are met. However, experts recommend that taxpayers carefully assess if a NOR received seems proportionate. Utilise your appeal rights if the NOR appears unreasonable.

While NORs may feel intimidating, taking expert advice early gives the best chance to challenge excessive security demands. HMRC should be prepared to justify its risk analysis if pressed through formal appeals.

How HMRC content with high-risk sectors

Certain business sectors are perceived as higher risk by HMRC when it comes to tax non-compliance and insolvency. These sectors tend to receive a disproportionate amount of NORs.

Construction and building trades are a prime example. Due to the contract-based nature of work, tax liability risk is increased. HMRC data showed that 33% of NORs in 2019/20 targeted construction sector taxpayers.

Other sectors prominently issued NORs include:

• Haulage and logistics businesses
• Restaurants, pubs and hospitality
• Professional sports clubs and players
• Waste management and recycling
• Agriculture and farming
• Care homes and social care services

These types of businesses often have high cash flows and turnover. HMRC focuses on them as tax compliance is seen as lower. Cash-intensive sectors can quickly accumulate large pending liabilities.

HMRC tries to work proactively with such sectors ahead of issuing blanket NORs. For example, tailored payment plans may be arranged for sports clubs with uneven income patterns.

Targeted sectors should seek advice on strengthening tax governance and communicating with HMRC openly on expected liabilities. This can prevent punitive NORs from being automatically issued.