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Debt Advice Handbook 14th edition

Income tax arrears

• The legal position
• Special features
• Checklist for action

**Alert: HMRC has issued a briefing setting out its current approach to collecting tax debts which is available at: gov.uk/government/publications/hmrc-issue-briefing-collecting-tax-debts-as-we-emerge-from-coronavirus-covid-19. HMRC says that clients should respond to communications as soon as possible in order to discuss the situation as otherwise they will not know if they need support or are refusing to pay. They say they want to work with clients to find a way for them to pay off their tax debts as quickly as possible but in an affordable way, such as a Time to Pay arrangement (an instalment payment plan). In appropriate cases, HMRC says that it may be able to offer a short term payment deferral for a set period of time during which HMRC would undertake no collection activity. Where clients are unwilling to discuss a payment plan or are failing to repond to communications, HMRC says that it will consider using its enforcement powers to collect outstanding tax debts.**

Most income above certain fixed limits is taxable. Employees are taxed by direct deduction from their income by their employer (the pay as you earn (PAYE) scheme). PAYE taxpayers rarely owe tax on their earned income unless mistakes have been made in the amounts deducted. Self-employed people receive their earnings before tax is deducted and are responsible for paying their own tax directly to HM Revenue and Customs (HMRC). Arrears are, therefore, more likely to occur with self-employment. See Chapter 16 for more information.

The legal position

Income tax is payable under the Taxes Management Act 1970 and the Income and Corporation Taxes Act 1988 and subsequent Finance Acts and regulations.

HMRC can take control of goods for unpaid income tax without a court order and is not subject to any limitation period for taking court action to recover the unpaid income tax and any interest, but penalties are subject to a six-year limitation period (see here). The client could even be imprisoned for non-payment. Tax debts of up to £3,000 owed by previously self-employed clients can be recovered through the PAYE system.

Special features

There are many ways of reducing liability for tax, unless it is deducted under PAYE. Self-employed people, in particular, require detailed advice on how to complete their tax returns and on any arrears that HMRC may be claiming. Self-employed people should obtain specialist help either from an accountant, Business Debtline or TaxAid if they wish to challenge the amount of any arrears claimed (see Appendix 1).

It may be possible to negotiate remission (write-off) of a tax debt if the client’s circumstances are unlikely to improve – eg, if s/he is permanently unable to work because of ill health or if s/he has no hope of increasing her/his income because of her/his age.

If the business is continuing to trade, however, it is vital that the client pays any ongoing tax on time and makes arrangements to repay any tax debt, otherwise HMRC can take control of essential goods without a court order and so close down the business.

Checklist for action

Advisers should take the following action.

•Consider whether emergency action is necessary (see Chapter 8).
•Consider whether the client should be referred to a specialist agency – eg, TaxAid.
•Otherwise, assist the client to choose a strategy from Chapter 8 as this is usually treated as a priority debt.