In this second article from TaxAid, Tina Riches and Ian Browne look at some more formal steps down the tax debt route.
To read the first article, which examined time to pay arrangements, click here.
Debt collection agencies
Sometimes the client may be contacted by a debt collection agency (DCA) on behalf of HMRC. You can check that the agency is genuine by comparing it to the list of private debt collection agencies used by HMRC.
DCAs have broadly the same powers as HMRC to agree time to pay over a period of up to 12 months. However, the DCA will not have any understanding of how the debt has arisen nor be able to revise the debt.
Can I reduce the tax debt?
It’s often worth appealing late filing penalties. HMRC is obliged by law to charge interest and cannot agree to freeze interest on the tax in order to help the client to clear the debt.
HMRC, like most creditors, becomes frustrated when debtors ignore their letters and don’t return their phone calls. With their patience at an end, HMRC’s debt management department (DM) will then consider pursuing formal legal measures.
If the client fails to agree on a payment plan with DM, then recovery action is likely to be taken. Recovery action may include legally taking control of goods (previously known as distraint), court action in the Magistrates' Court or County Court, or bankruptcy proceedings.
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If the client owes HMRC more than £5,000, has not been able to reach a time to pay agreement and HMRC has been unable to recover the money by other means (for example taking control of goods or County Court Judgment) then their file may be passed to HMRC’s enforcement and insolvency office (EIO) for bankruptcy action.
Being made bankrupt by HMRC is broadly similar to being made bankrupt by a commercial creditor. However, it is important to understand that the enforcement office does not behave like most commercial creditors. In particular, it often petitions for bankruptcy even where it is clear that there are no assets to liquidate to benefit HMRC.
DM has a wider duty to protect the tax system as a whole. Making a person bankrupt, even where it is clear they have no assets, may be done to stop further arrears accumulating, to strengthen HMRC's position if the person involved starts up in business again or to set an example to others to encourage payment of tax on time.
Indeed, sometimes the bankruptcy costs the government money because the bankrupt loses their home and/or job and is forced to rely upon social housing and/or welfare benefits. Where the debt has arisen due to a tax enquiry or tax evasion, it is more likely that HMRC will pursue the debt to bankruptcy.
Very occasionally, the enforcement office may decide not to take further action against a person who is unable to pay. This might apply where they have no assets and/or a low income, and their situation is unlikely to change because they are older and no longer economically active or suffering from long-term poor health. The tax is not written off; it is put into remission and is not collected unless the person’s financial circumstances change.
Bankruptcy is good for some people
Bankruptcy may sound negative, but it can sometimes help a person who is insolvent and needs a fresh start. Indeed, some people petition for their own bankruptcy; this is known as a debtor’s petition.
• Upon discharge from bankruptcy (normally after one year), income tax and other debts are written off (apart from maintenance obligations, parking fines and student loans).
• Their creditors may no longer contact them about their debts.
• The individual may lose valuable assets such as their home, investments and valuable private possessions.
• Until the bankruptcy is discharged, they are prohibited from certain jobs, such as being a company director, lawyer, chartered accountant or justice of the peace.
• Until discharge, the individual may not seek credit of more than £500 without declaring that they are bankrupt.
• The individual may have to make payments out of their income for the benefit of their creditors for up to three years.
• Their bankruptcy is published in the London Gazette and on the Insolvency Service's website, so people who know them personally may become aware of it, which may be embarrassing.
While many people would not want to accept these disadvantages, they may not matter much to your client if they have little of value and are in a job that is not prohibited.
Their home is unlikely to be at risk if it is rented, or they own a property with negative equity.
Where to go for help
Further detail on tax debt can be found on our TaxAid website. Low-income taxpayers in need of tax debt advice can call the TaxAid helpline. We will not act for represented clients, but in other cases, such as if you wish to refer a contact to us, agents can call our advisers helpline.
Kilimanjaro! You can do it!
See our fundraising page on the Bridge the Gap website, including details of our #Tax2020 Kilimanjaro challenge, where a team of tax professionals will attempt to reach the summit.
There is also more information, including details of our information evening on 24 September 2019. The tax charities would be delighted if you could join us in this challenge, to have fun, test your endurance and fundraising skills!
About Tina Riches and Ian Browne
TaxAid and Tax Help are charities that assist vulnerable people on low incomes with tax issues. We need to raise over £300,000 over the coming year just to maintain the current service – and more to scale up to meet demand. To learn more or support this vital work, go to www.bridge-the-gap.org.uk.