Category: Taxes

A business can fall behind with a relatively modest VAT or PAYE liability after one difficult trading quarter. Because the amount is not substantial enough to trigger immediate court action, some directors assume HMRC will give it less attention.

That assumption may become increasingly dangerous. The government is consulting on a new automated process for recovering lower value tax debts through monthly deductions from UK bank and building society accounts.

The proposals are not yet law. However, they show that HMRC wants a practical enforcement tool for taxpayers who can make payments but repeatedly ignore collection letters, calls and other contact attempts.

Quick Answer

• The proposals are currently at the consultation stage and are not confirmed law.
• HMRC does not presently expect the measure to cover total debts above £5,000 for individuals or £10,000 for companies, although the final limits remain undecided.
• It would apply only after HMRC’s standard collection process had been exhausted and the taxpayer had persistently failed to engage.
• HMRC is considering a 14-day Pre-Deduction Notice before the first monthly deduction.
• Taxpayers could object because of an HMRC error, financial hardship, additional support needs or third-party ownership of funds.

What Are Lower Value Tax Debts Under HMRC’s Proposal?

Lower value tax debts would be established HMRC liabilities that fall within proposed upper limits and remain unpaid after repeated collection attempts. The indicative limits are £5,000 for individuals and £10,000 for companies, including accrued penalties and interest at the point HMRC considers taking action.

These figures are not final thresholds. The consultation states that the upper limits have not yet been decided and seeks views on what would be proportionate.

HMRC would consider a taxpayer’s total debt across different tax regimes rather than examining each liability separately. The measure could therefore cover a combination of:

• Self Assessment Income Tax
• VAT
• PAYE and National Insurance
• Corporation Tax
• Stamp taxes
• Tax penalties
• Accrued interest

For example, a company owing £2,000 in VAT and £1,500 in PAYE would have a combined tax debt of £3,500 for the proposed eligibility test. Splitting liabilities across different taxes would not prevent them from being considered together.

Read: Employing Family Members in a UK Business: Why HMRC Is Asking Tougher Payroll Questions

Why Is HMRC Targeting Smaller Tax Debts?

HMRC is targeting smaller tax debts because many remain unresolved after letters, calls and referrals to debt collection agencies. Traditional enforcement methods can also cost too much to use efficiently against modest liabilities.

Official analysis indicates that approximately 4.8 million individuals and companies hold debts within the indicative limits. These represent around 11.5 million separate debts, with a combined value of about £4 billion.

Each year, more than 750,000 lower-value debts worth over £2 billion are returned to HMRC after debt collection agencies have been unable to secure payment. HMRC believes the absence of a scalable enforcement process may encourage some taxpayers to assume that smaller liabilities will not be pursued.

HMRC already resolves more than 95% of tax debt by value each year. Its concern is the remaining population of older debts where the taxpayer has repeatedly declined to communicate.

How Would HMRC Tackle Lower Value Tax Debts?

HMRC would tackle lower value tax debts by instructing a bank or other deposit-taking institution to make fixed monthly deductions from a taxpayer’s account. The proposed process would begin only after normal collection activity and opportunities to agree a voluntary payment plan had failed.

The likely process would be:

1. A tax liability becomes final and remains unpaid.
2. HMRC sends reminders and attempts to contact the taxpayer.
3. The case may be referred to a debt collection agency.
4. HMRC confirms that standard collection routes have been exhausted.
5. HMRC issues a formal Pre-Deduction Notice.
6. The taxpayer receives a final opportunity to pay, arrange Time to Pay or object.
7. If no action is taken, HMRC instructs the bank to begin monthly deductions.

The Pre-Deduction Notice would state the debt amount, penalties and interest, proposed monthly payment, deduction date and planned payment period. HMRC is considering allowing 14 days between issuing the notice and making the first deduction.

The 14-day period is only a consultation proposal. It is not yet a statutory deadline.

Which Debts and Taxpayers Would Be Within Scope?

The proposed power would cover individuals and companies with final, legally enforceable HMRC debts who have persistently failed to engage. It would not be a first response to a recently missed payment.

The following cases would be expected to fall outside the proposed process:

• Debts subject to an active appeal
• Liabilities under an ongoing enquiry or compliance review
• Recent debts still within HMRC’s standard collection cycle
• Debts covered by an agreed Time to Pay arrangement
• Cases already subject to another enforcement arrangement
• Taxpayers without an identifiable UK bank or building society account
• Overseas bank accounts

A disputed liability should not qualify merely because HMRC has issued an assessment. The amount would need to be final and legally enforceable, with the normal appeal process completed or expired.

This distinction matters. A taxpayer who disagrees with an assessment must challenge the underlying liability through the correct appeal route. Ignoring collection correspondence is not an effective way to preserve appeal rights.

What Safeguards Would Apply Before Bank Deductions?

HMRC proposes safeguards covering notice, affordability, additional support needs, objections, independent review and possible tribunal oversight. Automation would be paused where the available information suggests that human judgement is required.

The proposed safeguards include:

• More than 10 attempts to contact the taxpayer before using the power
• A formal notice before deductions begin
• Opportunities to disclose financial hardship or support needs
• Manual review by trained HMRC staff
• The right to object before or during the payment schedule
• An independent HMRC review of an objection
• A possible external appeal to a tribunal or court
• Refunds and compensation for charges caused by HMRC errors

HMRC proposes allowing objections where:

• HMRC has made a factual or procedural error
• The deductions would cause financial hardship
• The taxpayer requires additional support
• Funds in the account belong to another person
• A joint account holder has a beneficial interest in the money

An objection would pause deductions while HMRC reviewed the case. The proposed appeal route has not been finalised, although HMRC is considering a timeframe similar to the usual 30-day tax appeal deadline.

A complaint would be different from an objection. Complaining about HMRC’s service would not automatically stop deductions, although HMRC could intervene where its investigation identified an error or serious procedural failure.

Also Read: HMRC Automatic Bank Deductions: What Beneficiaries Must Know Now

How Would HMRC Decide Whether Monthly Deductions Are Affordable?

HMRC is considering using tax records, business information and credit reference data to estimate affordable monthly payments. The final methodology has not been decided and forms a significant part of the consultation.

For individuals, HMRC might consider PAYE information, Self Assessment returns and other income records. For businesses, it could consider VAT turnover figures or recently filed accounts.

The consultation also considers applying HMRC’s existing Time to Pay affordability principle. This generally means that debt repayments should not exceed 50% of the taxpayer’s disposable income.

However, an automated assessment may not reflect current circumstances. Historical profits, turnover or PAYE data may give an inaccurate picture after redundancy, illness, loss of a customer or a sudden decline in trading.

Taxpayers would therefore need to contact HMRC promptly where the suggested payment creates hardship. Financial difficulty would not automatically exclude someone from the process if they continued to ignore HMRC.

Under the current proposal:

• There would be no standard payment-plan length.
• Payment periods could vary according to debt and affordability.
• Penalties associated with the debt would stop accruing once deductions began.
• Interest could continue until the balance was cleared.
• HMRC is not currently proposing a fixed minimum balance that must remain in the account.

These details remain subject to consultation and could change before legislation is drafted.

How Is the Proposal Different From Existing Direct Recovery of Debts?

The proposed system would collect smaller liabilities through recurring instalments, while existing Direct Recovery of Debts normally involves holding and removing a lump sum. Existing DRD also has different thresholds and safeguards.

Under current DRD rules, HMRC can use bank information to recover established debts of more than £1,000. It must leave at least £5,000 available across the taxpayer’s accounts after placing the hold.

Existing DRD is largely manual. It involves obtaining bank information, placing money on hold and allowing the taxpayer 30 calendar days to object before funds are transferred.

The proposed lower-value system would instead:

• Operate through regular monthly deductions
• Be designed for high-volume use
• Use automated eligibility and affordability checks
• Potentially have a 14-day initial notice period
• Apply without the existing £5,000 protected account balance, provided the instalments pass affordability checks

HMRC restarted existing DRD through a controlled test phase in September 2025 and began a wider rollout from April 2026. The new monthly instalment proposal is separate and would require legislation before HMRC could use it.

What Should You Do If You Owe Smaller Tax Debts Now?

You should contact HMRC as soon as you know that a tax payment cannot be made in full. Early engagement provides more options than waiting for the debt to move into enforcement.

HMRC may agree to a Time to Pay arrangement where the proposed payments are realistic and affordable. Taxpayers setting up a plan should prepare details of their income, regular spending, assets, savings and other tax liabilities.

Companies may also be asked how they can reduce the debt by releasing assets, obtaining finance or introducing funds. HMRC will expect a company’s proposal to address both the overdue balance and its ability to meet future tax payments.

As at 16 July 2026, the main HMRC late-payment interest rate is 7.75%, applying from 9 January 2026. The rate is linked to the Bank of England base rate and can change, so it should be checked again before publication.

Ignoring the debt can lead to:

• Referral to a debt collection agency
• Recovery through PAYE or pension income
• Taking Control of Goods
• Direct recovery from bank accounts
• Court proceedings
• Bankruptcy or company winding-up action in serious cases

HMRC should provide notice before taking enforcement action, but continued non-engagement substantially reduces the opportunity to agree a voluntary solution.

Where an HMRC letter appears incorrect, retain the correspondence and supporting records. Consider obtaining advice before making admissions or agreeing to a payment schedule. 

FAQs About Lower Value Tax Debts

Can HMRC Take Money From My Bank Account Now?

Yes, HMRC already has Direct Recovery of Debts powers in limited circumstances. Existing DRD normally applies where more than £1,000 is owed and at least £5,000 would remain available across the taxpayer’s accounts. The proposed automated monthly deductions for lower-value debts are separate and are not yet law.

Could HMRC Use a Joint Bank Account?

Under the proposal, HMRC would consider a joint account only where no suitable sole account existed or a sole account held insufficient funds. A non-debtor joint account holder would be able to object where the money belonged to them. The final joint-account rules have not yet been legislated.

Would a Time to Pay Agreement Prevent Automatic Deductions?

An active and agreed Time to Pay arrangement would be outside the proposed automated deduction process. Taxpayers must maintain the agreed payments and keep up with new tax liabilities. A failed arrangement could lead HMRC to reconsider enforcement options.

Would Interest Stop Once Monthly Deductions Begin?

The consultation proposes stopping further penalties associated with the debt when instalment deductions begin. It does not propose stopping late-payment interest, which may continue until the balance is cleared. The precise interest treatment should be confirmed in any final legislation.

Can I Object Because I Cannot Afford the Proposed Payment?

Yes. Financial hardship is one of the proposed grounds for objection, and an objection would pause deductions while HMRC reviewed the case. You should provide current evidence of income, essential expenditure, cash flow and other debts rather than relying on a general statement that the payment is unaffordable.

Do I Need an Accountant to Deal With an HMRC Tax Debt?

An accountant is not legally required, but professional support can help verify the liability, correct returns, prepare affordability evidence and negotiate a realistic payment proposal. Advice is particularly valuable where the debt covers several taxes, the amount is disputed or HMRC is considering enforcement action.

How Can Apex Accountants Help With HMRC Tax Debt?

Apex Accountants can review how the liability arose, reconcile HMRC’s figures, identify errors and prepare a practical proposal for payment. Where the matter involves disputed assessments or formal enforcement, our HMRC tax investigation services can support communication and representation.

The sensible next step is to address the debt before HMRC exhausts its standard collection process. Book a consultation to discuss the liability, available payment options and any urgent HMRC correspondence.

A client came to Apex Accountants earlier this year after inheriting her late father’s house and modest savings. She was convinced the estate was far too small to attract any tax. It turned out her father had also gifted a large sum to her brother four years before he died, something she knew nothing about until the executors began pulling the paperwork together. That gift changed the whole calculation. It is a scenario we see often, and it is why inheritance tax calculation UK guidance matters before families assume an estate is too small to attract tax. 

With thresholds frozen for years and property values still climbing, the inheritance tax has quietly become one of the most talked about taxes in the country. Below, we answer the questions clients ask us most, in the order the calculation actually follows.

What is the basic tax-free allowance?

Every individual has a nil rate band of £325,000. The nil rate band has been fixed at that level since 2009 and, following Budget 2025, will remain frozen until 5 April 2031. Anything left within this threshold passes free of tax.

Is there anything else?

Yes. Where a main home is left to children, grandchildren or other direct descendants, an additional residence nil rate band of £175,000 can apply, taking a single person’s threshold to £500,000. This allowance is not automatic. It only applies to the value of a qualifying home passing to direct descendants and does not extend to lifetime gifts.

What about married couples?

Any part of the nil rate band or residence nil rate band that is left unused on the first death can be transferred to the surviving spouse or civil partner. In practice, this means a couple can often pass on up to £1 million between them before tax becomes due, provided the family home goes to children or grandchildren.

Does the residence allowance taper away for larger estates?

It does. For estates worth more than £2 million, the residence nil rate band is reduced by £1 for every £2 above that threshold. Once an estate reaches £2.35 million, the residence allowance disappears completely, leaving only the standard £325,000 threshold.

What rate do inheritance tax accountants UK apply above the thresholds? 

The standard rate is 40%, charged only on the portion of the estate above the available allowances. If at least 10% of the net estate is left to charity, the rate on the taxable remainder drops to 36%, which is worth factoring in at the will drafting stage rather than after the event.

How did the gift affect the inheritance tax calculation UK families had to make? 

This is the part people underestimate most. Gifts made in the seven years before death are generally pulled back into the estate for tax purposes. This is often called the seven-year rule. If a person survives seven years after making a gift, it falls outside the estate entirely. If they do not, the gift is added back, using up the nil rate band before the rest of the estate is assessed.

Where gifts made in that seven-year window exceed the nil rate band, taper relief can reduce the rate charged, but only on the portion of tax due, not on the value of the gift itself. The reduction runs on a sliding scale: full tax applies to gifts made within three years of death, then the effective rate steps down the longer the person survived afterwards, reaching its lowest point for gifts made between six and seven years before death.

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Are any gifts exempt from the start?

Several are, and they sit outside the seven-year rule altogether, as set out in GOV.UK’s guidance on gifts:

• An annual exemption of £3,000 per tax year, which can be carried forward one year if unused
• Small gifts of up to £250 per person, provided no other exemption was used on that person in the same year
• Wedding gifts, with limits depending on the relationship to the giver
• Regular gifts made from surplus income, provided the giver’s standard of living is unaffected
• Gifts between spouses or civil partners, and gifts to UK-registered charities

Is there anything on the horizon that could change these calculations?

Yes, and it is significant. From 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a person’s estate for inheritance tax purposes, following legislation confirmed in the Finance Act 2026. Pensions have historically sat outside the estate altogether, so this change will bring a meaningful number of estates into scope for the first time and increase the liability for others. Anyone relying on their pension as a tax-efficient way to pass on wealth should review that plan with accountants for inheritance tax planning well before the change takes effect. 

Where do we come in? 

For a reliable inheritance tax calculation UK families can act on, work out the full picture before assuming an estate is too small to matter. Add together the value of the home, savings, investments, and any gifts made in the past seven years, then apply the allowances in the right order. Getting the sequence wrong, or missing a lifetime gift, is one of the most common reasons families are caught out, and it is exactly the kind of detail inheritance tax accountants UK are asked to unpick once HMRC has already raised a question. 

The better approach is to work through the calculation properly before that happens. If you are unsure how your estate would be assessed, get in touch with Apex Accountants, accountants for inheritance tax planning, for a clear, professional review. It is a straightforward conversation now, rather than a complicated one later.

British retailers are calling on the government to accelerate plans to close the loophole for small parcel import taxes, which allows overseas sellers to ship low‑value parcels into the UK without paying customs duty. Their appeal comes after the 2025 Autumn Budget confirmed that the longstanding low-value import (LVI) relief will be abolished by March 2029 at the latest. For companies competing with online marketplaces that ship millions of parcels valued at £135 or less, the wait for reform feels too long. Accelerating the closure of the loophole for small parcel import taxes would align the UK with reforms in the United States and European Union, helping restore a level playing field for domestic retailers.

A loophole that has grown too large to ignore

Under current rules, individual consignments valued at £135 or less can enter the UK duty‑free. The relief was originally designed for infrequent and low‑value transactions, but it has become a fundamental part of cross‑border e‑commerce. Parcel operators and customs intermediaries submit simplified declarations using a Bulk Import Reduced Data Set (BIRDS), which allows them to clear multiple consignments at once. This simplification has helped overseas sellers to flood the UK market with very cheap goods. 

HMRC estimates that the number of consignments imported using BIRDS more than tripled between 2021 and 2024, reaching around 600 million parcels a year. During the same period, the value of low-value imports recorded in BIRDS rose from £3.8 billion to £5.9 billion.

Removing customs duty from these parcels made sense when cross-border parcel volumes were low, but the low-value import relief the UK now offers distorts competition. UK‑based retailers import goods in bulk and pay duties at standard tariff rates, while overseas sellers shipping individual parcels valued under £135 effectively avoid customs duty. The government acknowledges that this situation undermines fair competition and has committed to reforms that will require all sellers, regardless of their location, to pay duties on goods sold to UK consumers.

What the government proposes and why it matters

The 2025 Autumn Budget signposted an end to low-value import relief in the UK, describing it as an “unfair customs arrangement” that allows some online retailers to import goods duty-free. HM Treasury and HM Revenue & Customs have since published a detailed consultation outlining UK customs duty changes for parcels and the broader low-value import regime. The document proposes that the new arrangements take effect by March 2029. For UK high street chains, that timetable feels far away, particularly now that the US has removed its $800 de minimis threshold, and the EU plans to eliminate duty relief on consignments under €150 by 2028.

The government’s consultation suggests three key changes:

• Duty liability shifts to sellers and online marketplaces

Under the proposed LVI customs arrangements, sellers and the operators of online marketplaces will be responsible for paying customs duty on consignments of £135 or less. This mirrors the existing VAT model, where marketplaces must charge and remit UK VAT on low‑value sales. By consolidating liability, duty could be collected through quarterly payments away from the border. That would reduce disruption at ports and ensure duty is visible at the point of sale, improving price transparency.

Potential introduction of an administrative fee

The government is considering a flat fee on low‑value imports to fund the extra customs and border costs associated with processing millions of parcels. This fee would be limited to the cost of services rendered and would be paid by sellers or the platforms facilitating sales. Similar fees have been proposed or introduced in other jurisdictions.

A simplified tariff schedule

To help sellers and marketplaces apply the correct duty without having to assign full commodity codes to every item, officials are exploring a “tariff bucket” system – effectively grouping products into bands with set duty rates. Simplifying classification could make compliance more manageable for overseas sellers unfamiliar with the UK Global Tariff schedule.

The consultation also proposes that overseas sellers without a UK presence appoint a fiscal representative in the UK who would be jointly liable for customs debts. The government intends to maintain the existing relief on gifts valued at £39 or less sent between individuals.

Why retailers want reform sooner

Retailers pressing for change argue that waiting until 2029 will allow overseas platforms to cement an even larger presence in the UK. The consultation notes that low‑value import volumes are already substantial, with an estimated 1.6 million parcels arriving every day. Since the United States abolished duty relief for imports under $800 in 2025 and the EU is moving to scrap its €150 exemption, the UK has become an outlier. Industry groups worry that global sellers will increasingly divert their parcels to UK consumers to exploit the remaining duty relief, further eroding domestic market share. They also highlight product safety concerns; when goods circumvent import duties, they often bypass quality checks.

From a revenue perspective, the low‑value import relief is becoming expensive. Once goods are subject to duty, receipts could help fund public services. Introducing an administrative fee of around £2.60 per parcel, as suggested by some retailers, could raise over £1 billion annually. However, designing and implementing new systems will take time, and businesses need certainty. HM Treasury has therefore signalled that reforms must balance fairness with the practicalities of collecting duty and data at scale.

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Practical steps for businesses

Although the new regime and UK customs duty changes for parcels may be several years away, businesses should not wait to prepare. Overseas sellers and marketplace operators should review their supply chains, ensure that systems can capture and report product data, and prepare for quarterly customs duty payments. 

Those not established in the UK may need to appoint a fiscal representative and budget for administrative fees. UK retailers should assess how the changes could affect pricing and inventory strategies; some imports currently shipped under the £135 threshold may become subject to duty and higher costs. 

All stakeholders can respond to the government consultation, which runs until March 2026, and help shape the final design of the new customs arrangements.

The abolition of LVI relief also interacts with VAT. Since January 2021, the UK has abolished the VAT exemption for goods under £15 and requires sellers dispatching goods valued at £135 or less to register for UK VAT and charge it at the point of sale. Businesses must continue to account for VAT correctly while preparing for future customs duties.

How Apex Accountants & Tax Advisors can help

Navigating cross‑border trade rules is complex. Apex Accountants & Tax Advisors works with retailers, online marketplace operators and logistics firms to interpret the evolving customs and VAT landscape. Our team can help you:

• Analyse how the removal of the LVI relief and the potential small parcel import tax loophole closure will affect your cost base and pricing.
• Register for UK VAT and design systems to collect customs duty and VAT on low‑value consignments.
• Prepare for quarterly duty payments and develop processes for appointing fiscal representatives if you do not have a UK establishment.
• Model the financial impact of possible administrative fees and simplified tariff schedules.

We collaborate closely with clients to ensure compliance with HMRC guidance, integrate duty calculations into accounting systems and plan for changes well ahead of the March 2029 target. Contact Apex Accountants today to discuss tailored strategies for your supply chain and e‑commerce operations.

Frequently asked questions

What is the low-value import relief, and why is it being removed? 

The LVI relief allows consignments of goods valued at £135 or less to enter the UK without paying customs duty. The government plans to abolish it by March 2029 because the relief has been exploited by overseas sellers, distorting competition and undermining tax fairness.

When will the new customs arrangements come into force?

HM Treasury intends the new LVI customs arrangements to take effect by March 2029, but British retailers are urging the government to implement changes sooner.

Who will pay customs duty under the new regime? 

The consultation proposes making sellers and online marketplace operators responsible for paying duty on low‑value consignments, aligning with existing VAT rules.

Will there be any exemptions? 

The government plans to retain the relief for non‑commercial gifts valued at £39 or less sent between private individuals. All other consignments will be subject to customs duty and potentially an administrative fee.

What is the proposed administrative fee and why? 

Officials are considering a flat fee on low‑value imports to cover the cost of processing millions of parcels. Retailers have suggested a fee of about £2.60 per parcel, but the government is still gathering views through its consultation.

How should businesses prepare? 

Companies should ensure they are compliant with VAT rules, plan for quarterly customs duty payments and monitor the consultation. Overseas sellers without a UK presence may need to appoint a fiscal representative. Engaging with advisers, such as Apex Accountants, can help businesses adapt their systems and minimise disruption.