What is the HMRC?
The HM Revenue and Customs (HMRC) is a UK government department that oversees tax collection and administration. HMRC was created in 2005 and is responsible for collecting various taxes, including income tax, national insurance contributions, corporation tax, value-added tax (VAT), and excise duties.
The department also administers social security payments, such as tax credits and child benefits, and implements government policies related to customs and trade. HMRC is dedicated to ensuring taxpayers comply with relevant tax laws and regulations. It does this by providing support and guidance to individuals and businesses while investigating and prosecuting tax evasion and avoidance cases.
DRD Protocol Explained
Now, the Direct Recovery of Debts (DRD) protocol is a mechanism introduced by the HMRC that enables them to recover debts directly from the debtors’ bank accounts. This protocol allows HMRC to bypass the traditional court system and recover debts from debtors with outstanding tax debts of over £1,000.
Under the DRD protocol, HMRC can issue a “Direct Recovery of Debts” notice to a debtor’s bank, instructing them to freeze funds in the debtor’s account to cover the outstanding debt. The debtor will be notified before the funds are seized, allowing them to challenge the debt or plan to pay it off.
HRMC Tax Evasion Fears and Consultation
DRD does not extend to digital crypto wallets, which have become increasingly popular as a means of online payment for businesses and individuals because of their non-custodial nature. The HMRC fears that non-custodial hot wallets will perpetuate tax evasion because DRD has no extension in this realm.
In a public consultation document from April 27, 2023, the HRMC asked stakeholders: What are your views on whether and how HMRC should modernize to adapt to increased use of digital wallets, to minimize non-payment of tax debts? Consultation stakeholders responded that DRD should be extended to wallets.
Now, the makeup of non-custodial wallets makes it nearly impossible for seizures of assets to occur without the owner’s consent. To circumnavigate this, the HMRC has proposed new regulations which grant them the authority to seize Bitcoin holdings of tax evaders stored on crypto exchanges.
Storing cryptocurrency on an exchange leaves it vulnerable as it is hosted on an intermediary platform that users have no control over. The HMRC aims to exploit this vulnerability. Because crypto exchanges in the UK must comply with government standards to operate anyway, it will be much easier for the HMRC to extend DRD to these platforms.
