Bankruptcy can be a worrying word, but it’s usually a last resort. There are lots of steps to go through before it gets to this.
If you are going through any of these options, it’s really important to get professional advice. There’s information at the bottom of this page about where to go for help.
Can HMRC make someone bankrupt?
HMRC can apply to make someone bankrupt if they owe £5,000 or more.
In practice, this doesn’t happen lightly. Bankruptcy is normally considered after other options have failed. Out of the millions of debt cases HMRC deal with each year, only a small proportion lead to bankruptcy, also known as insolvency action.
HMRC may consider it where:
- The debt can’t otherwise be recovered
- Someone has actively avoided paying
- There’s concern that assets are being hidden or moved
HMRC must follow the same insolvency laws as any other creditor. They don’t have special powers outside those rules.
If you receive a bankruptcy petition, get advice straight away. There may still be options. There’s information below about where to find advice.
Other insolvency options.
Bankruptcy isn’t the only route. Depending on your situation, there may be alternatives.
Individual Voluntary Arrangement (IVA).
An IVA is a formal payment plan set up through an insolvency practitioner.
They look at your debts, income and essential spending. If your creditors agree, you make affordable payments over a fixed period. At the end, remaining qualifying debt may be written off.
It’s formal and legally binding, so independent advice is important before agreeing to one.
Debt relief order (DRO).
If you have low income, few assets and debts under £50,000, a Debt Relief Order could be an option.
A DRO is:
- Designed for people with modest debts
- More informal than bankruptcy
- Less public
To qualify in England or Wales, you generally need to show that:
- You can’t pay your debts
- Your total debts are £50,000 or less
- Your savings and assets are under £2,000
- Any vehicle you own is worth less than £4,000
- You don’t have spare income at the end of the month
- You haven’t had a DRO in the last six years
- You’re not currently bankrupt or in an IVA
DROs are arranged through approved debt advisers. There’s no fee to apply.
There is a similar scheme in Scotland.
Even though a DRO can be helpful, it’s still a serious step. It affects your credit record and financial position. Always get independent advice before applying.
You must get proper advice first
Bankruptcy, IVAs and DROs all have long-term consequences.
They can affect:
- Your home
- Your job in some professions
- Your ability to get credit
- Your financial independence
Before going ahead with any insolvency process, speak to a qualified debt adviser or insolvency practitioner. A Citizens Advice adviser or other voluntary organisation can also help you understand your options.
Taking advice doesn’t commit you to anything. It just helps you see the full picture.
Special Relief – when a tax bill is based on estimates.
Sometimes tax debt builds up because HMRC have issued estimated figures. This often happens if tax returns weren’t filed on time.
If the estimate is higher than the true amount of tax that should have been charged, you’re still have to pay for it by law – unless you successfully claim Special Relief.
Special relief is a complex and narrow area of law.
HMRC can legally pursue bankruptcy even where the debt is estimated. But they may agree not to, if:
- You can provide evidence of your actual income, and
- It would be “unconscionable” (unreasonably much more than it should be) to recover the full estimated amount.
“Unconscionable” is a very strict test. It’s not enough to say the estimate is high. You must show it’s unreasonably excessive and that there were genuine reasons the returns weren’t filed on time.
Conditions for Special Relief
To qualify, three main conditions must usually be met:
- It would be unreasonably excessive to recover the estimated tax.
- Your tax affairs are up to date, or you’ve agreed a plan to bring them up to date.
- You haven’t previously claimed Special Relief (or its earlier version, Equitable Liability), even if that claim failed.
You must also:
- Submit the missing tax returns
- Confirm formally that you’re making a Special Relief claim
- Confirm you haven’t already claimed it
- Confirm you haven’t already had a court judgment in person for that tax
- State that the information you’ve given is correct to the best of your knowledge
The claim is sent to HMRC’s Specialist Claims Team.
This is not an easy process. The guidance published by HMRC shows that relief is only given in limited situations.
Examples where HMRC may consider relief include:
- Temporary or serious illness, including mental health difficulties
- Not receiving HMRC letters for reasons outside your control
- Situations involving insolvency, where other creditors would be unfairly affected
Situations that are usually not accepted include:
- Not responding to HMRC letters
- Assuming tax taken at source means nothing else is due
- Moving abroad and not leaving a forwarding address
- Simply failing to deal with responsibilities despite knowing about them
In short, Special Relief may be possible if you were:
- genuinely prevented from acting by something outside your control
- you can prove the correct amount of tax.
Information and advice on bankruptcy.
Here are some links to where you can find information and advice on bankruptcy and tax debts:
- Local debt advice services can be found on the Money Advice Service website (UK wide)
- StepChange offers debt advice and guidance on bankruptcy
- Citizens Advice has information about debt and money
England and Wales
- The Royal Courts of Justice CAB has a bankruptcy advice service
Scotland
- Citizen’s Advice Scotland has debt advice available here.
Northern Ireland
- The Citizen’s Advice Bureau has a page with sources for advice in Northern Ireland
Tax help.
We give free professional tax advice to people on low incomes or with difficult personal circumstances. Find out more about the help we offer.
If you appoint a professional accountant or tax adviser to help you with your tax, you should do so with care. We have tips on how to choose a tax adviser or accountant.