Advisers’ Decision Tax Debt Tree

Question 1: Is there a debt due to HMRC?

Hidden tax bills

• Part-time workers may have incorrect tax codes. They can be underpaying or overpaying tax. Have they checked their tax codes?
• State pension is taxable but not taxed at source. Tax due on the state pension is usually recovered by taxing other income. Errors are common, especially where there is part-time work and pensions
• Selling property could be a route out of debt, but is likely to result in a Capital Gains Tax bill. For 2016-17, this is roughly 10% /20% for higher rate taxpayers (2015-16 – 18% basic rate taxpayers /28% for higher rate taxpayers) of the difference between sale and original purchase price – less an annual exemption which exempts the first £11,100 of the gain (2016/17 rate)
• Many state benefits are taxable eg State Retirement Pension; Carer’s Allowance; Jobseeker’s Allowance; Contributions based ESA; add some therapeutic work, or a pension, and the result can be a hidden tax liability; for list of taxable benefits see http://www.hmrc.gov.uk/manuals/eimanual/EIM76101.htm
• Undeclared income can mean a hidden tax debt. See ‘If you have not declared your income’ for details: https://taxaid.org.uk/guides/taxpayers/undeclared-income
• CIS subcontractors usually have income tax deducted from their income, but if they do not file tax returns as self-employed people HMRC may estimate a tax bill for them. The estimated bill makes no allowance for the tax deducted at source
• HMRC can create new debts – even going back 20 years in cases of ‘deliberate error’; existing crown debts do not go out of time

Why clients may be at risk

• Tax debts (except for National Insurance) are not statute barred after 6 years (5 years in Scotland)
• Estimated debt can be enforced, even to bankruptcy
• Bankruptcy is likely even when there are no assets
• Home visits are likely even before court involvement
• In England and Wales, HMRC has a right to legally take possession of goods without needing a court order (peaceable entry)

Back to Question 1

Question 2: Do you agree that you owe this amount?

Estimated bills

In the absence of completed tax returns from the tax payer, HMRC can estimate the taxable income and tax due. This is called a determination. Tax due under a determination is legally enforceable and can only be displaced by the client submitting tax returns – and there are time limits for doing this.

Back to Question 2

Question 4: About you

Exceptional circumstances

HMRC may agree to suspend collection where there has been a sudden unexpected turn of events such as an unexpected illness or bereavement or the collapse of a major customer or supplier.

In exceptional cases, where the client is elderly, in ill-health, on low-income and has negligible assets, HMRC may agree to remit a debt. This means that it is taken off the system, but could be brought back to life if client’s circumstances change.

Victims / health and mental health issues

People who have been subject to domestic or other violence, have significant physical or mental health challenges, or who are otherwise at risk, need special treatment. Unless contact has been made with HM Revenue and Customs and explanations given, such client’s may be treated by the system as deliberate non-payers.

Back to Question 4

Question 5: Details about the debt

Which HMRC office is involved?

There are layers of offices within Debt Management and Banking – each with different levels of authority. What level has the client reached?

• Accounts office  (Time to Pay)
• Recovery Office (Taking Control of Goods, Court Action, Time to Pay, Direct Recovery of Debt)
• Enforcement and Insolvency Service office (Bankruptcy, last minute offers and arrangements, IVA and Protected Trust Deeds(Scotland))

Urgent issues:

Late Filing Penalties

Late filing penalties can reach £1,600 or more over 12 months. These apply even when no tax is due. For years up to and including 2009/10 late filing penalties (other than separately imposed daily penalties) were £200 a year and could not exceed the tax owing for the year (and unpaid by the filing deadline of 31 January)

3 and 4 Year deadlines

3 years after the filing date of 31 January, estimated tax bills (‘determinations’) cannot be amended. The only exception to this is if the determination is made late, in which case the taxpayer has 12 months from the date the determination is made.

There is real danger of client’s being left with a tax debt based on estimated figures if they delay in sending in a tax return. The only solution when the estimated demand has become fixed is Special Relief. This is a solution available from HMRC Debt Management and Banking via the Enforcement and Insolvency Office.

HMRC may agree to give up its legal right to a debt which has been estimated, but there are very strict conditions.

The risk for many clients who are self-employed is that HMRC may not accept that they have good enough records to prove their income figures, and insufficient reason, in HMRC’s view, for failing to submit a return on time – so the estimated debt will stand.

If the tax bill is not a determination then the taxpayer has 4 years from the end of the tax year in which to submit a tax return.

Special Relief

For information on Special Relief, see the end of the page on Bankruptcy https://taxaid.org.uk/guides/taxpayers/tax-debt/bankruptcy

Imminent recovery action or court action

Eg Taking control of goods; Court papers; Bankruptcy Action; Direct Recovery of Debt;

Tax Enquiries

One a tax enquiry is settled by a contract settlement there is little that can be done to reduce the amount due. For a very recent enquiry there may still be a chance. For more on Enquiries see https://taxaid.org.uk/guides/taxpayers/tax-returns/enquiriess

Back to Question 5

Question 6: Is the caller seriously insolvent?

If client faces bankruptcy or an IVA, ensure that all tax returns are up to date so that tax debts can be included. This is particularly important if client has undeclared income which could otherwise be considered tax evasion and subject to criminal proceedings.

Timing of bankruptcy is important for tax credits as only finalised (post renewal) tax credit overpayments will count as bankruptcy debts. Watch out for joint claims as there is joint and several liability.

Back to Question 6

Question 7: Is the caller an urgent case?

Information on Court action can be found in the tax debt section of the website

• Court proceedings
• Bankruptcy

Back to Question 7

Question 8: Is the caller a possible remission case?

Remission is not widely advertised as an option. It can be appropriate where the only alternative would be bankruptcy and there are no significant assets.

Where the taxpayer owns a property and is elderly, HMRC might consider a charge on the property as an alternative to bankruptcy

Back to Question 8

Question 11: Can the caller offer payments within HMRC’s Time To Pay (TTP) parameters?

Time to pay information

Tax returns

All outstanding tax returns need to be submitted before time to pay is agreed. (In practice HMRC may provisionally agree time to pay and allow, say, 30 days for the returns to be filed)

Penalties for late payment

Late payment penalties can add to the bill – agreeing Time To Pay should avoid additional charges – see http://https://taxaid.org.uk/guides/taxpayers/tax-returns/late-filing-penalties-and-appeals

Payments on account

These are due 31 January and 31 July. They are set at half the previous year’s liability. Where profits are falling they may be too high and can be reduced on-line, by phone or by using form SA303

More detailed information see https://taxaid.org.uk/guides/taxpayers/tax-debt/wrong

Failing to keep to an agreement

It is important not to be overcommitted. HMRC is likely to take recovery action through the court if an instalment is missed. Future payments would then be under a court judgment.

No agreement

Reasons why HMRC may not agree time to pay:

• Out standing tax returns;
• proposal doesn’t cover ongoing liability as well as arrears;
• previous history of non-compliance or late payment;

Back to Question 11