Income tax arrears
HMRC says it wants 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).
1 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 fail to respond to communications, HMRC says 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 HMRC. Arrears are, therefore, more likely to occur with self-employment.
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.
Recovery of debt can be by court action, or, more likely, by summary warrant. A summary warrant is a type of court order granted by the sheriff court for certain types of debts that are owed to local authorities and HMRC. They are issued to recover taxes and water and sewage charges and authorise sheriff officers to carry out formal legal debt recovery.
Special features
There are many ways of reducing tax liability, unless it is deducted under PAYE. Self-employed people, in particular, require detailed advice on completing their tax returns and 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.
A good source of basic information for the self-employed client is the Low Incomes Tax Reform Group ().
It may also be possible to negotiate remission (write-off) of a tax debt if the client’s circumstances are unlikely to improve – eg, if they are permanently unable to work because of ill health or if they have no hope of increasing their income because of their age. This, however, is entirely at the discretion of HMRC. The tax is not permanently written off, but you will not receive further demands unless your circumstances improve unexpectedly.
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.