Taking Control of Goods (Fees) (Amendment) Regulations 2021

Baroness Meacher Excerpts

Thursday 13th January 2022 Lords Chamber

Moved by

[Baroness Meacher]

That this House regrets that the Taking Control of Goods (Fees) (Amendment) Regulations 2021 (SI 2021/1288), laid before the House on 18 November 2021, fail to deal with the injustice to debtors from 2014 to the date guidance on the new Regulations took effect.

[Baroness Meacher (CB)]

My Lords, I rise to move my Motion to Regret Statutory Instrument 1288—enforced in England and Wales—on taking control of goods. Today’s debate provides an opportunity to highlight the fact that since 2014, debtors have been wrongly charged VAT on the enforcement of debt repayments, when the tax should have been charged, of course, to the creditors involved. Enforcement officers are providing a service to creditors and—believe me—not to debtors.

The VAT chargeable is upon the service to creditors, and it is those creditors who should have paid. This issue and the inaction over seven years by both government and industry to clarify the situation was drawn to my attention by the organisation Just and the debt advice services. They focused on the impact of the incorrect charges on the most vulnerable in society and the injustice involved.

I emphasise at the start that the failure to sort out this injustice over the years was principally the responsibility of previous Ministers and industry. We are grateful that the Government are finally issuing this SI, which will ensure that the injustice does not continue into the future. The reason for this Motion to Regret is the failure of this SI to deal with seven years of injustice from 2014 to 2021, which has resulted in millions of pounds of incorrect charging. This debate provides an opportunity for the Minister to clarify steps that will be taken to resolve the VAT payment injustice once and for all and to ensure that debtors are repaid where they were incorrectly charged.

Before setting out why we believe the Government must take action on these misdirected demands, I want to explain why this injustice is so serious. Of course, the link between debt problems and mental health is well established. The Money and Mental Health Policy Institute estimates that people with money problems are three times more likely to commit suicide than those without debts. The stress associated with debt is a major contributor to depression and other mental health symptoms. Additionally, money issues often affect entire households, so parents, children, family members and friends are impacted by the damaging effects of debt, not just one individual.

Given that this Government have made protecting the vulnerable one of their primary objectives and so much work has been done by our society over the past few years to make mental health a more mainstream issue that people should take seriously, helping those with money issues should be an absolute priority. Given the cost-of-living crisis in the UK at the moment, it has arguably never been a more important time to discuss these issues.

Let me outline what has been going on. In the High Court enforcement sector, judgment debts for things such as unpaid utility bills are charged to debtors: the person in debt. The creditor—the company owed money —will employ a High Court enforcement officer to recover this money. This officer will ensure that the debtor pays the money owed and will charge the debtor fees for the enforcement action taken. That is not unreasonable, you would think. On top of these fees, High Court enforcement officers will charge VAT. This in itself is not an issue, as in 90% to 95% of cases the officers act on behalf of VAT-registered debt enforcement companies. But, as I have said, this VAT should be charged to the creditor, who can recover the VAT incurred from HMRC if the company is VAT registered.

However, since 2014, the regulations have been misinterpreted by industry and, if I may say so, have been unclear. Instead of charging the VAT or a VAT-equivalent fee to the creditors, this money has been charged to the debtors, as I have said. This means that the debtors, who are already financially vulnerable and face hefty fees—often unreasonably hefty fees, I should say—on top of their debts have also wrongly been charged hundreds of additional pounds. Industry estimates that about £120 million may have been taken incorrectly from vulnerable debtors. That is over £1 million a month—a lot of money from very vulnerable people.

This practice is clearly absolutely unacceptable; how has it been going on for seven years? It is clear from documents publicly available online that the High Court Enforcement Officers Association—the membership body that represents these officers and is authorised by the Ministry of Justice—raised this issue with the ministry as early as 2015, yet no action was taken either by industry or by government. Of course, that is the fault not of current Ministers but certainly of previous ones. I want to make clear that the noble Lord, Lord Wolfson, wrote to me and indicated that somehow the ministry had only just heard about this in 2019. In responding, the Minister might accept that 2015 is actually the date when the ministry knew about it.

The High Court Enforcement Officers Association, authorised by the MoJ, sought legal advice from Christopher Wilson QC to clarify the issue. Wilson, in his advice, said, “HMRC recognised in 2000 that debt enforcement was a service to creditors and they should issue VAT invoices only to creditors.” Nevertheless, Wilson’s findings were inconclusive, but his most important recommendation was that the High Court Enforcement Officers Association should take the advice of leading counsel on tax matters on the issue. Again, no further action was taken after this.

Four years went by without anything changing. The issue was never addressed and was kept quiet by both government and industry. For the Government, this was a problem they themselves had created by not providing clear guidance in the regulations. Perhaps Ministers at the time felt that any action was an admission of guilt and to do nothing was probably the safest option. The industry had a strong incentive to let sleeping dogs lie: debt enforcement companies appeared cheaper to creditors because they were not charging VAT on their fees. This made them comparable to a creditor using the Government’s own bailiff services, whereby VAT is not charged. They were benefiting from collecting the extra cash from debtors.

In 2019, a new entrant to the industry, an organisation called Just, sought advice from Melanie Hall QC, a tax specialist. It did this after reviewing the previous advice issued to the High Court Enforcement Officers Association by Christopher Wilson QC—something the association and the MoJ should have done four years earlier. This kick-started the process to resolve the issue. Hall’s guidance was clear that debtors should not be charged VAT or a fee equivalent to it. This guidance provided the opportunity for Just to engage the MoJ and for the Government to provide clarity and thereby correct the situation. After six months of campaigning from Just, parliamentarians and the debt advice sector, the MoJ published draft guidance privately—I emphasise “privately”—to key stakeholders in March 2020, clarifying that debtors should not be charged VAT or an equivalent fee where creditors are not VAT-registered. Although this guidance was not perfect, it resolved 90% to 95% of debt enforcement cases going forward where debtors would otherwise have been charged VAT incorrectly.

This was a momentous step in the right direction, though the guidance was issued only privately. Sadly, this was not the end of the story. It took the MoJ a further 19 months to publish this guidance. Covid-19 undoubtedly had an impact on MoJ resources, but the delay in publishing the guidance meant that more debtors overpaid on their debts, reducing their already depleted and no doubt minimal disposable income and potentially costing them an additional £19 million over those months.

After months of silence from the MoJ, Just decided that action needed to be taken and sought an application for direction from the Royal Courts of Justice. This meant taking the Government to court and allowing the court to clarify whether this practice should continue. The prospect of losing in court galvanised the Government. I want to emphasise this point: just four minutes before the judgment hearing at the Royal Courts of Justice, the MoJ published its guidance and promised to lay a statutory instrument to clarify the existing regulations. I will leave it to noble Lords to consider whether we would be having this SI had there not been the court case.

That brings us to today. Statutory Instrument 1288 makes clear in Regulation 18(1) that

“where a creditor is VAT registered the enforcement agent may not recover from the debtor VAT or the sum equivalent to VAT on the fees or disbursements.”

I want to clarify that I warmly welcome the clarity provided by this statutory instrument. As I said, my reason for tabling a Motion to Regret to this SI concerns the failure of this crucial document to address the injustices of the past seven years. It is silent on the need for those who have been wrongly charged VAT on the activities of enforcement officers to be repaid. Surely, they should be.

This is especially important because the statute of limitations outlines that there is only a six-year window in which debtors could rightfully claim for this money to be returned to them. This inaction means that, sadly, for some debtors, it is already too late to get their money back. I want these vulnerable people to know that parliamentarians are aware of the injustice they have suffered. Even more importantly, I want to make sure that Ministers have considered what action they should take to ensure repayment of the money wrongly paid by debtors over the past seven years. I have already emphasised the importance of this money to the most vulnerable indebted families. A few hundred pounds could make the difference for someone’s children to eat three meals a day for the rest of the month or for a family to heat their home over the winter months. The sort of sums we are talking about can be really crucial for them. It may not be crucial to any of us, but for these families it really is.

--- Later in debate ---

I apologise for rattling through that. This area is not without its complexity. We have sought to make the position absolutely clear going forward, and as regards past cases, I hope that I have set out the Government’s position with clarity, even if, as I suspect, it may not meet entirely with the noble Baroness’s approval. None the less, I hope that I have set out the Government’s position.

[Baroness Meacher (CB)]

My Lords, even before I thank the Minister, I owe the noble Lord, Lord Low, an apology. The Minister shot up rather quickly after the contribution of the noble Baroness, Lady Boycott, but I think the noble Lord, Lord Low, was planning to speak. I should have stood up and said something, and I apologise that I failed to do that.

[Lord Low of Dalston (CB)]

I am happy.

[Baroness Meacher (CB)]

I thank the noble Lord.

I thank the Minister for his response. I will make just a few tiny points. The Minister made quite a play on how not all debtors have overpaid the VAT sum or equivalent. In fact, 95% of debtors have been in this position and have been improperly overcharged, so we have to bear in mind that the vast majority of debtors are in this position.

The Minister indicated that of course creditors can be in great poverty. I point out to the Minister and your Lordships that we know that the vast majority of these cases involve utility companies and local authorities, not your little man with thruppence ha’penny in his pocket. So I do not think we can buy that one.

I am glad that the Minister accepted—I think—that the ministry should have acted earlier. Most importantly, I thank him for saying that the Government will be keeping an eye on the legislative process. That is our one bit of assurance. I, like others, thank Just very much indeed for pursuing this issue on behalf of these very vulnerable people. We have to rely on the courts to make a sensible decision; let us see how they go.

I thank the Minister but also very much thank noble Lords who have stayed around for an inordinately long time, waiting for this debate. I beg leave to withdraw my regret Motion.

Motion withdrawn.