Tax debt, bankruptcy and Special Relief
Problems paying your tax? guide
HMRC can petition for bankruptcy if you owe £5,000 or more. HMRC will only petition for insolvency as a last resort after considering all other options. Of all insolvency proceedings that take place about 10% are petitioned by HMRC. In the 2019/20 tax year HMRC petitioned 5,604 cases out of the 6.5 million debt cases they handled. Cases will be considered for insolvency of the debt is irrecoverable, the individual has actively avoided paying what they owe or HMRC suspect that they are hiding or manipulating their assets.
HMRC is no different to any other creditor and is strictly bound by the requirements of Insolvency Law.
For detailed advice on bankruptcy you can refer to the Citizens Advice, StepChange or Business Debt Line.
The insolvency processes include:
An Individual Voluntary Arrangement (IVA)
This can be proposed by an insolveny practitioner who submits information about the debts, income and expenditure to work out a payment plan.
Bankruptcy and Winding Up Order
If HMRC petition for insolvency then a bamkruptcy or winding up order may be granted by the court. A Turustee may be appointed to liquidat the debtors assets and distrubute them to the creditors.
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.
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 term “unconscionable ” means unreasonably excessive.
- 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’
The claim should be sent to Debt Management, Specialist Claims Team, HMRC, BX9 1SD.
Unconscionable means “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.