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Debt Advice Handbook 14th edition

1. Deciding on priorities

• Recognising priority debts
• Secured loans
• Rent
• Ground rent and leasehold charges
• Council tax
• Fines, maintenance and compensation orders
• Child support
• Utility charges
• TV licence
• Tax and value added tax
• Hire purchase, conditional sale agreements and bills of sale
• National insurance contributions
• Tax credit overpayments

After dealing with any emergencies, checking whether the client is liable for the debts and maximising the client’s income, advisers need to identify which debts must be dealt with first – ie, which debts are priority debts. The criteria for deciding which debts are priorities are largely ‘objective’ – the severity of the legal remedies available to creditors determines the degree of priority. If non-payment would give the creditor the right to deprive the client of her/his home, liberty or essential goods and/or services, that debt has priority.

When considering whether goods and services are essential, you should consider the client’s personal circumstances. A debt is not a priority debt merely because the creditor can prioritise itself by deducting money from the client’s earnings or benefits to repay the debt without a court order, although clearly this affects the client’s ability to maintain her/his essential expenditure and the income s/he has available to make payment arrangements with her/his other creditors. For a discussion of other debts which are not strictly priority debts as defined above but may, nevertheless, need to be treated as priority, see Chapter 9.

Clients often believe that priorities must be decided on the basis of the amount owed, or that any debt that is subject to a court order should be a priority. The existence of a court judgment does not automatically give priority status to a debt and there are many judgments given by courts in England and Wales each year for debts that remain unpaid. These debts only become a priority if the enforcement methods available to a creditor through the court pose a serious threat to the client’s home, liberty or essential goods.

Penalties for non-payment of priority debts

 

Debt	Ultimate penalty
Mortgage/secured loan arrears	Eviction
Rent arrears	Eviction
Ground rent and and leasehold charges	Forfeiture of lease and repossession of property by freeholder
Council tax arrears	Imprisonment (in England only)
Unpaid fine/maintenance	Imprisonment
Child support arrears	Imprisonment
Gas/electricity arrears	Disconnection
Income tax/national insurance/VAT arrears and some tax credit overpayments	Goods taken control of by bailiffs
	Bankruptcy
Hire purchase arrears	Goods repossessed
Bills of sale	Goods repossessed

Recognising priority debts

• Secured loans
• Rent

Using the criteria outlined above, the following are priority debts.

Secured loans

Mortgages and all other loans secured against a client’s home are priorities because non-payment can lead to possession action by the lender, and homelessness. One of the strategies outlined in this chapter must be adopted immediately for any secured loan in arrears. For emergency action, see here. If the lender has already begun possession proceedings, see Chapter 12.

Rent

Rent arrears are a priority because they can lead to possession action by the landlord, and homelessness. If the landlord has already begun possession proceedings, see Chapter 12.

A client who is a tenant may find that water charges are paid as part of the rent, so s/he could be evicted for non-payment. In such cases, water charges should be considered as a priority. If a client is threatened with possession proceedings for non-payment of water charges, see Chapter 5.

For emergency action, see here.

Ground rent and leasehold charges

• Council tax
• Fines, maintenance and compensation orders
• Child support
• Utility charges
• TV licence
• Tax and value added tax
• Hire purchase, conditional sale agreements and bills of sale
• National insurance contributions
• Tax credit overpayments

A property may be bought on a long lease rather than freehold where there are communal areas – eg, in blocks of flats and housing estates with shared parking and green spaces. Long leases typically include clauses requiring occupiers to pay an annual ground rent along with service charges for upkeep of the communal areas. Some may also include provision for administration charges – eg, for consent to alter premises.

Ground rents often increase after set periods (eg, every 10 years) and increases can be substantial. Service and administration charges should be detailed in the lease and relate to the costs actually incurred by the landlord. These costs can be challenged by an appeal to an independent tribunal if they appear unreasonable.

Arrears of ground rent, service charges or administration charges are classed as priority debts as failure to pay can be viewed as a breach of the lease. They can ultimately lead to the lease being forfeited and the property being repossessed by the freeholder. There will be a court hearing if the freeholder is bringing forfeiture action.

The freeholder can only start forfeiture action for not paying ground rent if the leaseholder:

•has been in arrears for three years or more; and
•owes £350 or more in ground rent (or a combination of ground rent, services charges and administration charges).

A freeholder can also take action to seek a county court judgment for arrears, or ask the mortgage lender to pay as an alternative to forfeiture action, thereby adding the arrears to the mortgage.

Leaseholders can obtain free, independent advice from lease-advice.org.

Council tax

Council tax arrears are a priority because non-payment could ultimately lead to imprisonment in England. From 1 April 2019, non-payment can no longer lead to imprisonment in Wales, but it has been agreed that arrears should still be treated as a priority as councils are generally quick to take court, followed by enforcement action, that can add significant costs to the debt.

If the magistrates’ court has issued a liability order (which allows the local authority to use bailiffs) or the client is facing a committal hearing or a warrant has been issued that could result in imprisonment, see here and here. If the local authority has a liability order and the amount outstanding is at least £1,000, it can apply for a charging order in the county court (see here). If the local authority has served a statutory demand on the client or issued a bankruptcy petition, see here.

Fines, maintenance and compensation orders

Unpaid fines, maintenance and compensation orders being enforced in the magistrates’ court are a priority because non-payment could lead to imprisonment. If the client is in arrears with any of these debts, even if no bailiff or other enforcement action has been taken, see Chapter 13. For emergency action, see here.

Child support

Child support arrears are a priority debt because, in addition to being able to recover them by deductions from the client’s earnings/benefits or from the client’s bank account without a court order, the Child Maintenance Service can obtain a liability order which enables it to instruct bailiffs to take control of goods. Ultimately, non-payment could lead to an order disqualifying the client from driving or from obtaining or holding a passport or other UK travel authorisation for up to two years or even to a term of imprisonment for up to six weeks.

Utility charges

Payment for gas and electricity are priorities because suppliers can disconnect for non-payment of bills. This is also the case for other types of fuel, where the supplier can withhold delivery for non-payment. Such sanctions do not apply to arrears on non-fuel items (eg, cookers or the cost of central heating installation purchased from gas and electricity suppliers), so debts for such items are not a priority.

Help with arrears may be available from one of the energy company’s trust funds. Clients on a low income (eg, getting pension credit) might qualify for a £140 Warm Home Discount. See gov.uk/the-warm-home-discount-scheme for more details.

If disconnection is threatened, make immediate contact with the supplier to challenge this and discuss ways of paying for the supply (see here).

Water companies cannot disconnect a water supply for non-payment and so payment for water is not a priority. You should include a realistic amount for current consumption of water, but not for arrears, in the financial statement. Help with arrears may be available from one of the water industry’s trust funds, or the WaterSure or WaterSure Plus schemes may be able to help with high bills (see here). These schemes are designed to help people on low incomes in receipt of specified benefits who have a water meter and who have unavoidably high water use.

TV licence

A colour TV licence costs £157.50 a year in 2020. Payment plans are available to spread the cost (see tvlicensing.co.uk).1See P Kyle, ‘A simple plan’, Adviser 185 Although not a debt as such, because it is a criminal offence to use a television without a licence (for which the usual penalty is a fine), if a client either does not have a licence (but does have a television) or is behind with a payment plan, this should be treated as a priority.

Some people qualify for a concession on the cost of the TV licence – eg, clients who have sight impairments or who are living in residential care. Prior to 1 August 2020, a person aged 75 or older was entitled to a free licence. However, with effect from 1 August 2020, only people aged 75 or older in receipt of pension credit are entitled to a free licence. TV Licensing is writing to inform anyone in receipt of pension credit how to claim their free licence and also explaining the payment options to individuals not entitled to a free licence because they are not in receipt of pension credit. The 75+ Plan enables clients aged 75 or older to manage the cost of a licence by paying in weekly, fortnightly or monthly instalments.

In April 2021, TV Licensing wrote to those people older than 75 who had not yet made arrangements for a new licence, encouraging them either to set up a paid-for licence or claim a free licence if eligible. Speclialist customer service advisers can be contacted on 0300 790 6151. Information is also available at tvl.co.uk/75.

A grace period has been in place for those over 75 who have yet to purchase a TV licence, which expired on 31 July. TV Licensing is now writing again to those clients to explain how to set up a TV licence, that help and support are available and providing information on the availability of payment plans and how to check eligibility for a free licence. Since the end of October 2021, TV Licensing has begun making ‘customer care visits’ to people over 75 who are required to have a TV licence but have not yet made arrangements to do so. TV Licensing emphasises that such visits are not ‘enforcement visits’.

 

1     See P Kyle, ‘A simple plan’, Adviser 185 »

Tax and value added tax

These debts are a priority if the client is continuing to trade because HM Revenue and Customs (HMRC) can take control of goods from the client to cover unpaid tax without requiring a court order or could make the client bankrupt and put her/him out of business. If the client has ceased trading, each case must be looked at on its merits. If:

•bailiffs are involved, see Chapter 14;
•action has been started in the magistrates’ court, see Chapter 13;
•action has been started in the county court, see Chapter 10;
•emergency action is required, see here.

See also Chapter 16.

Hire purchase, conditional sale agreements and bills of sale

Some hire purchase or conditional sale agreements and loans secured by a bill of sale must be treated as priority debts if they are for goods that are essential for the client (eg, a car for work in the absence of suitable public transport), because the creditor has powers to repossess the goods if payments are not kept.

National insurance contributions

Class 4 national insurance contributions for self-employed earners are a priority because they are assessed and collected by HMRC along with unpaid income tax.

Tax credit overpayments

Where the period of the award includes 31 January 2019 or pre-dates 31 January 2019 and for some other claimants whose awards begin on or after 1 February 2019, these debts are a priority because, in addition to being able to recover an overpayment from an ongoing tax credit award or through amending the client’s pay as you earn (PAYE) code, or directly from her/his bank account without a court order in some circumstances, HMRC can use bailiffs to take control of the client’s goods without a court order and those bailiffs can apply to the court for a warrant to use reasonable force to enter the client’s premises. Although the client could even be imprisoned for non-payment, it does not appear to be HMRC policy to pursue such debts in the magistrates’ courts where they would have to establish the client’s non-payment was due to wilful refusal or culpable neglect before committal could be considered (see here).1See ‘Q&A’, Quarterly Account 54, IMA, pp26-27

 

1     See ‘Q&A’, Quarterly Account 54, IMA, pp26-27 »