Occasionally, no matter how well you think you might have planned, a tax bill can come as an unexpected surprise.
In circumstances where you are not able to pay by the deadline, its important to know what options are available to you as a taxpayer. We discuss some of the routes you can take below as well as what happens when you are unable to reach an agreement with HMRC.
Time to pay arrangements
If you cannot pay your tax bill in full, you might be able to agree with HMRC to pay it in instalments. This is called a ‘Time to Pay’ arrangement.
Depending on the type and level of tax you owe, it is possible to set up a payment plan online. HMRC outlines the eligibility criteria and process for doing so.
If you do not meet the criteria to set up a payment plan online, that doesn’t mean you cannot access the scheme, it just means that you or your advisers need to contact HMRC to arrange a bespoke, means-tested plan. To arrange this HMRC will likely request details of your personal savings, assets and liabilities as well as your regular income and expenditure each month.
The plan will also include interest, known as ‘forward interest’, which differs from statutory late payment interest and is the cost of borrowing the funds from HMRC to settle the debt.
It is a good idea to set these plans up as soon as you realise you might have trouble paying and it is possible to shorten and lengthen your plan with HMRC as your position changes. Early engagement with HMRC is key.
Means-restricted offers
Sometimes referred to as ‘substandard’ offers, these occur when there is no dispute over the quantum of the debt owed to HMRC but there is no realistic prospect of the debt ever being repaid in full. Under HMRC’s ‘care and management’ powers they are able to accept offers for less than the amount actually due if it maximises the return for the Exchequer.
This is not the same as ‘doing a deal’, which are not possible given they are not compatible with HMRC’s Litigation and Settlement Strategy.
In our experience HMRC will not ordinarily accept a means-restricted offer that does not, as a minimum, cover the tax element of their debt. In other words, they are more likely to exercise their care and management powers when considering not seeking to collect interest and penalties that may be due.
To be clear, means-restricted offers present the last chance for a taxpayer to settle their debt with HMRC before formal enforcement proceedings are taken which are discussed below. The Menzies’ TDD team has experience of agreeing means-restricted settlements with payment terms, but these are rare.
If you do not pay
If you do not settle your tax liability, HMRC will first try to contact you and resolve the issue as above. If you do not respond or refuse to pay, then HMRC will consider other collection options available to them, such as:
- Collection directly from your wages (or pensions) via a CCJ
- Take things that you own and sell them
- Deduct money directly from your bank account
- Take you to court
- Make you bankrupt
It is therefore very important and beneficial to you to let HMRC know as soon as you get into trouble making payments. The sooner you can arrange a plan, the more favourable the results will be.
HMRC outsourcing debt
If you do not respond to HMRC’s requests for payment or refuse to pay what you accept is legally due, HMRC can use a debt collection agency to assist them. The debt collection agency will contact you via letter or phone to discuss your payments and can assist you in setting up a time to pay arrangement on behalf of HMRC. If you cannot pay or cannot agree to a time to pay arrangement, the agency will pass your case back to HMRC to take further action.
HMRC have a list of agencies that they use and methods to confirm the identity of an HMRC collector. It is important to check this if you are approached by a debt collector to ensure they are legitimate and not a scammer.
Statutory demands
A statutory demand is a request for payment of a debt. Anyone (including HMRC) who is owed money can make a statutory demand if they are owed in excess of £5,000 from an individual.
When an individual that owes money receives a statutory demand, they have 21 days to either pay the debt, reach an agreement to pay or challenge the statutory demand by requesting it be ‘set aside’.
If the statutory demand is not successfully challenged, then HMRC can take make a formal application to a court to petition for the taxpayer’s bankruptcy.
Bankruptcy
Becoming bankrupt is another way to deal with debts that you cannot pay although it has significant long-term implications. You can be made bankrupt either by applying to be bankrupt or being made bankrupt by someone you owe money to. Given the serious consequences of becoming bankrupt it advised that professional advice is sought from an insolvency specialist, such as Menzies’ Business Recovery team.
The application to become bankrupt costs £680. In addition, you may have to sell things that you own (sometimes including your home), that are not essential to your living to pay towards your debts. The Trustee in bankruptcy may apply for an Income Payment Arrangement or Order that allows them to take money from your income to contribute towards your debts if you have excess surplus.
Bankruptcy means that you could be free from most of your debts (with a few exceptions). However, bankruptcy can be very restrictive and is a matter of public record with your name and address available in the Gazette and the Individual Insolvency Register.
Usually, you are discharged from bankruptcy after 12 months which means that the restrictions applied during bankruptcy are lifted, but the assets at the point you were made bankrupt, still form part of the bankruptcy estate. In addition, the public record is permanent and being declared bankrupt can affect your ability to get credit for 6 years following.
Breathing space
Breathing Space is also known as Debt Respite Scheme, and it is a temporary protection for individuals from creditors including HMRC.
The protection lasts for 60 days and whilst protected no enforcement action can be taken against you, interest will not be added to your debts and creditors cannot contact you about your debts.
The idea is that whilst you are under protection, you are able to obtain advice on your debts and make a plan to repay them. Breathing Space does not write off the debts that you owe.
There are circumstances where the protection will be extended past 60 days, for example if you are getting mental health crisis treatment.
In order to apply for Breathing Space, you will need to appoint a debt adviser who will help you decide if it’s the right thing to do.
For more information on managing tax debt problems please speak with Menzies’ Tax Dispute and Disclosures team, or if your case has progressed to the point where HMRC has issued a statutory demand or threatened you with bankruptcy proceedings, speak with a member of Menzies’ Business Recovery team.
