HMRC forcing bankruptcy

HMRC forcing bankruptcy

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A new client of mine (sole trader) had not submitted any tax returns for 4 years, these have now been filed and he has a bill of £8000, most of which is made up of penalties. After speaking with hmrc and completing an income and exenditure, he offered them £200 a month to pay it off over just over 3 years, but explained this may go up if his workload increases. They have refused it and told him his only option is to go bankrupt as he doesn't own anything for them to repossess. Can they do this ? I have other clients paying off tax debts over similar periods and paying less than that and it has never been a problem. I can't imagine why hmrc would not only force him into this, ultimately meaning they will get no money out of him at all, but this will mean he can no longer obtain credit which in the future he was hoping to do to enable him to expand his business. Theyve given him no option to appeal either. It all sounds a bit odd to me, I've never experienced this with a client before.

Replies (18)

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By WhichTyler
03rd Oct 2014 09:14

High risk

Given that your client didn't appear to intend to meet their obligations until they were forced to by HMRC (4 years non-submission; did they 'come in from the cold' on their own initiative?), you could expect HMRC to take a slightly jaundiced view! 

If the underlying business is successful (given that he wants to expand), can't he borrow the funds elsewhere?

 

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By bernard michael
03rd Oct 2014 09:12

They can present a bankruptcy petition but they have no power to force him to declare himself bankrupt. I suggest he talks to an IP  

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By King_Maker
03rd Oct 2014 09:13

The short answer is Yes.

Does he have other debts? If so, is an IVA an option?

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Stepurhan
By stepurhan
03rd Oct 2014 09:31

Bankrupt anyway?

You say that most of the £8,000 is penalties. Assuming "most" to mean 50% (though most implies more) then the tax and Class 4 is at most £1,000 a year. That means that, at it's height the business has generated £12,000. What the heck is he living on if that is the level of his income? HMRC aren't exactly looking at a guarantee of even what they are being offered on that level of profit. Far better for them to get the case gone by bankruptcy rather than have anyone waste time dealing with it dragging on.

Your client can't obtain credit in the future if that happens? Guess that's one of the consequences for ignoring your legal obligations for four years. Actions (or inactions) have consequences.

To deal with the purely legal position, I believe you will find HMRC have as much power as any other creditor to petition for bankruptcy. You might get lucky and have a court accept that such a slow repayment for such a long-term debt is a reasonable offer or you might not. Any mitigating circumstances they can offer for not complying with their legal obligations?

 

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By lesley.barnes
03rd Oct 2014 10:01

Penalties

Putting aside the rights and wrongs of the client not submitting tax returns have you appealed the recent penalties under Donaldson? At the moment HMRC are not chasing penalties from 2010/11 but you have to appeal them. HMRC remove the penalties until the decision is reported and the client can concentrate on clearing his unpaid taxes. If the decision is in Donaldsons favour the penalties will be scrapped or it will be appealed by HMRC which again will take some time. I would advise that if the client can he either puts money to one side to pay the penalties whilst this is going on. Obviously there is the risk that Donaldson loses and the penalties are due which raises the spectre of insolvency again but it seems a shame to bankrupt someone and then find the penalties weren't due. 

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By Hknightas
03rd Oct 2014 10:23

Thank you
I had suggested to him obtaining a loan to pay it off but having just spoken to him he does want to go the bankruptcy route ! I was only surprised because hmrc have always been very helpful and accommodating towards clients in similar situations in the past. I spoke to them on his behalf yesterday and came away feeling like I'd just been told off in the headmasters office ! However I can understand HMRC's position now.
Thanks again for your comments. I hope you all have a lovely weekend

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By Kirkers
03rd Oct 2014 10:47

In all honesty it seems your client is rushing things.

£8,000 is quite a small amount to go bankrupt over, especially since you can appeal the daily penalties (over four years totalling £3,600) under Donaldson. They won't push for collection of that until the case has been sorted. 

Then I'd try again for £200 a month, and it'll be paid off in less than 2 years at that rate (+ whatever the Donaldson outcome is).

Bankruptcy will affect any mortgage applications, credit cards, mobile phone contracts when his current one is up and a range of other things we'd consider quite normal. I had a friend who went bankrupt and 3 years on she still can't obtain a bank account with a card that allows her to use it at a counter, only to withdraw money from a cash point and pay for everything in cash. 

He'll find it nigh on impossible to have a business bank account and chances are his current personal account will be closed too. It's not an easy get-out-of-debt card to play.

For £8,000 I'd suggest he consider all routes before going down the bankruptcy option.

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By zebaa
03rd Oct 2014 12:57

bankrupt - employers view - disagree with Kirkers

Some time ago I had an employee go bankrupt, in his case the sum owed was about £10,000 with the money being mostly owed to HSBC ( spent on holidays, entertainment and nothing which retained any value). They offered a five year repayment plan but after considering the options he decided that was too long. He was also paying for a child with a former girlfriend and decided that child payment & loan payments would leave him with little for leading his life.

I admit that I was doubtful he had made the right move, but as it worked out he had. First, he paid no income tax for the rest of the tax year - so instant pay rise. Second, in less than twelve months he was discharged so no debt hang-over. He was able to get a basic bank account with either RBS or HBOS ( I can not remember, this was about 5 years ago) via which he was paid his wages. This worked for him as he had no real assets - no house, no car etc.

In hindsight HSBC were foolish to keep offering rollover loans which just got bigger and bigger over several years. Without doubt he was spending more than he earned and it was these loans which financed his lifestyle.

My point in the post though is a simple one. If a person has no assets then accepting debt is foolish. Bankruptcy works well for such a person.

 

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Replying to lionofludesch:
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By Kirkers
03rd Oct 2014 13:08

Agree to an extent

zebaa wrote:

Some time ago I had an employee go bankrupt, in his case the sum owed was about £10,000 with the money being mostly owed to HSBC ( spent on holidays, entertainment and nothing which retained any value). They offered a five year repayment plan but after considering the options he decided that was too long. He was also paying for a child with a former girlfriend and decided that child payment & loan payments would leave him with little for leading his life.

I admit that I was doubtful he had made the right move, but as it worked out he had. First, he paid no income tax for the rest of the tax year - so instant pay rise. Second, in less than twelve months he was discharged so no debt hang-over. He was able to get a basic bank account with either RBS or HBOS ( I can not remember, this was about 5 years ago) via which he was paid his wages. This worked for him as he had no real assets - no house, no car etc.

In hindsight HSBC were foolish to keep offering rollover loans which just got bigger and bigger over several years. Without doubt he was spending more than he earned and it was these loans which financed his lifestyle.

My point in the post though is a simple one. If a person has no assets then accepting debt is foolish. Bankruptcy works well for such a person.

 

I agree to an extent but if they can appeal under Donaldson that would freeze nearly half the penalties making the payment plan look a lot more optimistic. Even if Donaldson lost the case it would still give the client more time to save a bit of money. If they win - then he's mitigated half the penalties and it could all be paid off within two years. 

We don't know the client's personal situation and I accept the very valid reasons you've mentioned I just think for the sake of exploring all the options I wouldn't be so quick to go down the bankruptcy route. Especially since if the Donaldson case did end in the client's favour it would only be 2 years worth of paying it off. Put that against being discharged after a year, minimum, of bankruptcy with a mark on your credit file and the difficulties that can come with I'd personally rather pay off the debt. 

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By bernard michael
03rd Oct 2014 14:30

The original question you asked was can HMRC force him to declare bankruptcy. The answer is NO.They can present their own petition, which save shim the court fee Which is your client opting for?

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By David Gordon FCCA
06th Oct 2014 12:35

Bankruptcy

As said the short answer is any creditor can petition if the debt is over £750.

 As far as penalties are concerned there is case law regarding appropriateness of penalties in ratio to tax due.

 So apart from The Donaldson case you should look this stuff up.

 You should also carefully check to see whether HMRC have done all their paperwork correctly.

 The tribunal are strict about this.

 

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By Andy Reeves
06th Oct 2014 13:44

Get paid


With a client about to file for bankruptcy, I would make sure I got paid pretty quickly!

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7om
By Tom 7000
06th Oct 2014 13:57

No

They petition him and pay

It goes to court , yer man says I have been paying £200 a month

the judge says to HMRC why you bankrupting him then

HMRC blush stammer

And the Judge throws it out

 

Basically he has to call their Bluff

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By rota2
06th Oct 2014 22:07

Free debt advice from StepChange charity

I suggest your client contacts www.stepchange.org which is a charity that provides free advice. I have a client who is in a similar situation. I have advised my client on his tax position and I am negotiating on my client's behalf with HMRC on a time to pay agreement. My client is using the online calculator on StepChange to calculate what he would have to repay if he went bankrupt, which is really helpful. I am checking the calculations.

My client thinks his income will increase over the next couple of years and it appears that the amount he would have to pay to HMRC in bankruptcy would not be much different to repaying HMRC in full.

My client has just about accepted that whatever happens there will be a significant drop in his living standard, which was the cause of the tax debt in the first instance - he spent what should have been paid to HMRC.

I have no previous experience of this type of work and it will be interesting to see what happens. My client is paying my fees regularly as he will still need accounts and tax returns.

I would welcome any comments or advice.

 

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By halblackburn
07th Oct 2014 11:07

Instead of bankruptcy

has your client considered the option of a debt relief order ?

My understanding is that while an unpaid creditor (HMRC) can petition the Court for a bankruptcy order against the debtor, the debtor can pre-empt matters by getting a debt relief order in place before the bankruptcy petition is made.  The DRO binds the debtor to make regular payments that they can afford and binds the creditor(s) to accept them.

IPs don't mention this course of action as they don't earn a fee from it.  The last time I looked the fee was £90 payable by the applicant to the Court at the time of application.

 

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By Manraj Mand
07th Oct 2014 12:57

DRO will not be applicable in

DRO will not be applicable in this instance if we presume the client's disposable income is £200 pm (ie the offer he is proposing to HMRC) unless he can demonstrate that his reasonable needs equates to him having a disposable income of £50 or less per month.

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By David Gordon FCCA
07th Oct 2014 16:01

HMRC ATTITUDE

 

 You cannot blame HMRC.

 When I used to work on HP accounts for a major car dealer, statistically there were far fewer defaults on one and two year agreements. In fact it was very rare for persons to default on one year agreements.

 Apart from back taxes, the taxpayer has to keep current tax up to date.

 

 

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