Tax debt, bankruptcy and Special Relief
Problems paying your tax? guide
Bankruptcy is one way the law deals with people unable to pay their debts. Following an order of bankruptcy, a Trustee is appointed who takes possession of your assets towards payment of your debts fairly between your creditors. Bankruptcy imposes a number of restrictions on what you can do. For detailed information on bankruptcy, obtain advice from an adviser from the list of contacts in section 10 of this guide. Being made bankrupt by HMRC is broadly similar to being made bankrupt by a commercial creditor, but you will need to be aware of the following additional factors.
If you owe HM Revenue and Customs £5,000 or more, and:
- Have been unable to reach an agreement with HMRC for time to pay
- HMRC has not been able to recover the money by other means, such as taking control of goods, or by a Court Judgment
then your file may be passed to the HMRC Enforcement and Insolvency Office (EIO) for bankruptcy action.
What happens when your file reaches the Enforcement Office?
When your file reaches the EIO, it will write to ask you to pay the full debt quickly (normally within 14 days). EIO will sometimes accept an arrangement for the tax to be paid by instalments. Usually it will be looking for a lump sum and the balance within a matter of months. It will not usually consider any offer that will take over a year to clear the debt. Normally the repayment period will be much shorter.
If you are not able to pay the tax as a lump sum or agree a payment arrangement, the Enforcement Office will usually write to say that it is starting bankruptcy proceedings.
Bankruptcy proceedings will also be started if you agree a payment plan but fail to stick to it.
It is important to understand that the Enforcement Office does not behave like most commercial creditors. In particular, it often petitions for bankruptcy even where it is clear that this there are no funds available, because the taxpayer has no significant assets. Indeed, sometimes the bankruptcy costs the government money, because the bankrupt loses their home and/or job and is forced to rely upon social housing and/or welfare benefits. Where the debt has arisen due to a tax enquiry or tax evasion, it likely that HMRC will pursue the debt to bankruptcy.
Very occasionally the Enforcement Office may decide not to take further action against a person who is unable to pay. This might apply where you have no assets, low income, are not working, and your situation is unlikely to change in the future – possibly due to age or long-term ill-health.
The statutory demand
The first stage in the legal process is the statutory demand. This is a formal document stating the amount owed to HMRC, and requesting payment within 21 days. Normally this will be delivered to you by hand.
By law you may apply to have a statutory demand from any creditor “set aside”, for example because the amount demanded is not due, but in tax cases such an application is unlikely to be successful. This is because the certificates produced by HMRC, stating that tax has been charged and has not been paid, must be accepted by the court as sufficient evidence that the tax is due, even if the figures contain estimated amounts of tax.
The bankruptcy petition
Three weeks after the Statutory Demand, HMRC may present a bankruptcy petition in Court. The petition is usually filed in London, and is then served on you personally. If you try to keep out of the way, so as to avoid receiving the petition, the court may order service in another way, for example by post or advertisement.
The petition gives details of the tax due and tells you the date and time when the case will be heard at the Bankruptcy Court.
Note: HMRC does not automatically petition for bankruptcy following a Statutory Demand. In some cases you may want to be made bankrupt by HMRC, so that you can move on, only to find yourself in a state of suspense where HMRC does not follow through with a bankruptcy petition. In such cases you may wish to consider making a petition for your own bankruptcy to end the uncertainty.
The bankruptcy hearing
There is a process for opposing a bankruptcy petition but, as with a statutory demand, there will not often be good grounds in a tax case.
More often, you may want to ask the court for an adjournment, to allow time to raise the money, or
- Reach a payment arrangement with HM Revenue and Customs, or
- Make a claim for Special Relief (unless this has been excluded due to contesting the debt in court previously)
- File any outstanding tax returns and make any claims which could reduce the amount due (e.g. terminal loss claims if a business has ceased trading)
- Make a complaint if you believe that this might lead HMRC to withdraw its demand
The court may be prepared to grant an adjournment. This might be, for example, for a couple of months.
If, during the period of the adjournment:
- You are successful in raising the money necessary to clear the tax debt, or
- You reach an agreement with HMRC to reduce the debt or get the tax demand withdrawn
then HMRC will apply to have the petition dismissed. This would be the end of the matter.
If you are not successful, HMRC will ask the court to make an order for your bankruptcy, to which the court is likely to agree.
Bankruptcy is good for some people
Although the term “bankruptcy” may sound negative, it can sometimes help a person who is insolvent and needs a fresh start. You need to weigh the “downsides” of bankruptcy against the possible advantages.
The main advantages of bankruptcy are that:
- When you are discharged from bankruptcy, your debts are written off. This includes income tax and most other debts; but not maintenance obligations, parking fines and student loans
- You will normally be discharged after one year, or less
- Once the bankruptcy order is made, your creditors may no longer contact you about your debts
- If HMRC makes you bankrupt, you will not have to pay the court fees
The main downsides are that:
- You may lose valuable assets such as equity in your home, investments and valuable private possessions
- You are prohibited from certain jobs – e.g. being a company director, lawyer, chartered accountant, or justice of the peace, until you are discharged
- You may not seek credit of more than £500 without declaring you are bankrupt
- You may have to make payments out of your income for the benefit of your creditors for up to 3 years
- your bankruptcy is published in the London Gazette and people who know you personally may become aware of it, which may be embarrassing
While many people may wish to avoid bankruptcy, for others the advantages may outweigh the disadvantages. Much depends on your personal circumstances. For example, for most people, what happens to their home is very important, but your home is unlikely to be at risk if it is rented.
If so, you may not mind HMRC petitioning for your bankruptcy.
Indeed, you may decide to speed things up by presenting a “debtor’s petition” for bankruptcy, although in this case you would have to pay a deposit of £525 towards the costs of administering your bankruptcy, and a court fee of £180 (which may be waived for people on income support).
Debt relief orders
If you have few assets and debts of under £20,000 then you may want to apply for a debt relief order (DRO). This procedure has a lower cost, is more informal, and has less publicity than bankruptcy. It was introduced in England and Wales for people who have more modest debts, have little or no disposable income and no assets to repay what they owe. (A similar scheme exists in Scotland, see the Accountant in Bankruptcy website).
DROs cost £90 and are administered by “authorised intermediaries” (many of whom are advisers in Citizens Advice Bureaux), and the main requirements are that:
• you are unable to pay your debts
• you owe up to a maximum of £20,000
• your total gross assets do not exceed £1,000
• after taking away tax, national insurance contributions and normal household expenses, your disposable income is less than £50 a month.
There is more guidance on DROs in ‘Guide to Debt Relief Orders’ published by the Insolvency Service, which may be downloaded from https://www.gov.uk/government/publications/debt-relief-orders.
But do get independent advice
Petitioning for bankruptcy or a DRO is a serious step. There are pitfalls, so it is important that you get good independent advice before going ahead.
This could be obtained from a money adviser in a Citizens Advice Bureau or other voluntary organisation, or from a registered insolvency practitioner.
Individual voluntary arrangements
Bankruptcy can sometimes be avoided by entering an individual voluntary arrangement (IVA) with your creditors. This is an arrangement to pay your debts over a period of time. Usually you will pay back less than the full amount owed, by agreement with your creditors. The agreement may last 5 years or more and must be approved by over 75% of your creditors (by value of the amounts owed).
Unfortunately, many people facing tax debts are unable to make an IVA because:
- They have insufficient on-going income to fund an IVA. You need a relatively high income to cover repayments to creditors and to pay the insolvency practitioner who is required to supervise the IVA, or
- Creditors who are owed 25% of the total debt vote to block the proposals. If HMRC is your major creditor, its vote alone could block the IVA
It is worth exploring this route if you want to avoid bankruptcy and you have sufficient on-going income. Most insolvency practitioners will be happy to have a short meeting with you – without making any charge – to consider whether this is possible. You can search for an Insolvency Practitioner on-line at https://www.gov.uk/find-an-insolvency-practitioner .
It can be difficult to obtain HMRC’s agreement to an IVA. In practice about half the proposals submitted are likely to be rejected by HMRC.
If your tax debt includes estimated amounts of tax, and it is too late to submit a tax return, Special Relief is your last resort.
HMRC is legally entitled to make you bankrupt, even where the debt is estimated. But HMRC may agree not to pursue its legal right if you can provide acceptable evidence of your taxable income, and in HMRC’s view, it would be ‘unconscionable’ to pursue recovery of the full amount. This is a very difficult test to pass.
Conditions for Special Relief
There are three specific conditions which need to be fulfilled in order to obtain Special Relief. These are:
- It would be unconscionable, in HMRC’s view, to recover the estimated tax, or to deny a refund if the tax has been paid.
- The individual’s tax affairs are up to date, or that an acceptable arrangement has been agreed to bring them up to date.
- That Special Relief, (or its predecessor, Equitable Liability) has not been claimed before; even if the request was rejected. (This condition may, exceptionally, be disregarded)
In addition, the taxpayer will need to declare:
- That they wish to make a claim for Special Relief under Schedule 1AB, Taxes Management Act 1970, paragraph 3A, and specify the tax year(s).
- Confirm that they believe that an excessive Determination of their tax liability has been made
- Confirm that they have not previously made a claim for Special Relief or, under the previous provisions, Equitable Liability
- That they have not been subject to Court proceedings for any tax charged by the determination(s) included in their Special Relief claim where they were present or legally represented at a Judgment hearing
- That their tax affairs are up to date, apart from those covered by their current claim and that all the particulars given in their claim are correct and complete to the best of their ‘information and belief’
There is a sample layout for such a declaration here:
Version for England and Wales: Special-Relief-Letter E and W
Version for Scotland and Northern Ireland: Special-Relief-Letter S and NI
Information on making a claim: Special Relief – How to claim
Unconscionable means “completely unreasonable” or “unreasonably excessive”. This is a very strict test to pass. It is not enough that the estimated bill is much higher than bills in other years, or that you could make a better estimate of the amount due.
HMRC has published guidance on Special Relief. The guidance shows how narrow the scope of the relief is. HMRC’s guidelines on ‘unconscionable’ give an indication of the circumstances in which HMRC will, and will not, apply the relief. On the ‘not normally’ accepted as unconscionable list, we find:
- Someone who registers as self-employed, but never trades
- Someone who ceases to be self-employed, but who does not complete final Returns and provide a forwarding address to cover the enquiry window. This is normally 12 months from the date the Self-Assessment Return was filed
- Construction industry subcontractors who neither file Tax Returns, nor respond to HMRC, on the mistaken assumption that, as they have paid some tax at source, they need do no more
- Someone who moves abroad and does not respond to HMRC as regards outstanding debts, or leave a forwarding address
- Someone who is negligent from HMRC’s point of view, in that they were aware of their responsibilities, but did not act or respond to communications
These groups might include, for example, employees, non-residents, or those due a refund under CIS. Clients in categories such as these, might find it difficult to establish a right to Special Relief on the terms outlined under the guidance.
Those on the ‘acceptable reasons’ list include:
- Someone suffering from temporary or sporadic illness, who finds it particularly difficult to engage with the tax system. This could cover both physical and mental illness
- Someone who has not received communications from HMRC due to factors outside their control
- Someone who is insolvent: HMRC may be sensitive to the position of other creditors here
Overview and further information
In overview, HMRC’s approach could be paraphrased by saying that Special Relief should be denied if the taxpayer knew about, or ought reasonably to have known about and used, another route, and failed to do so within the time limits, unless he or she was prevented by a reason outside his or her control. There must also be acceptable evidence of the correct tax liability.
When a claim is made for Special Relief, the tax returns for the relevant year(s) – and any other outstanding years must be submitted (those for the relevant years should be submitted with the claim).
For further details see:
- County Court Judgment
- Enforcement and Insolvency Service. The HMRC department responsible for taking bankruptcy action and dealing with insolvency.
- set aside
- an application to the court to have the bankruptcy petition dismissed or cancelled
- Debt Relief Order. A simplified form of bankruptcy.
- Debt Relief Order. A simplified form of bankruptcy.