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HMRC Debt Treatment in Insolvency Situations

Introduction: Navigating the Complexities of HMRC Debt and Insolvency

Since 1948, Jack Ross Chartered Accountants has provided state-of-the-art accounting services in Greater Manchester and beyond. We pride ourselves on our dedication to financial integrity and technological innovation. Whether you are a sole trader or a large corporation, our clients are our priority. 

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Owing money to HM Revenue and Customs (HMRC) can be a daunting experience, particularly when you are unable to pay and facing insolvency. HMRC is a creditor like no other; they have powers that far exceed those of standard creditors. This article aims to guide you through the intricacies of how HMRC debt is treated in insolvency situations.

HMRC as a Creditor: What You Need to Know

HMRC is considered a preferential creditor in cases of insolvency, which means they are given priority over other creditors. The debts owed to HMRC typically include VAT, Corporation Tax, Income Tax, and National Insurance contributions. If you find yourself in arrears with HMRC, it is crucial to consult a licensed insolvency practitioner as soon as possible.

The Insolvency Practitioner: Your Guide through the Labyrinth

An insolvency practitioner is a qualified individual who can advise on your best course of action when facing insolvency. They can guide you through various options available for debt relief and help you come to an arrangement with your creditors, including HMRC.

Voluntary Arrangements: A Route to Consider

One common route is an Individual Voluntary Arrangement (IVA) for individuals or a Company Voluntary Arrangement (CVA) for businesses. These are formal insolvency procedures that allow you to repay your creditors, including HMRC, over a fixed period. You may be able to pay back the money you owe through affordable instalments.

HMRC Debt Relief: Navigating Payment Plans and More

If you owe money to HMRC, you can also consider a Time to Pay Arrangement. This is a formal agreement with HMRC where you can repay your tax debt through a payment plan over 12 months or a longer period, depending on your situation. However, this arrangement needs to be agreed upon with HMRC, and it is best to get in touch with them as soon as you realise you are unable to pay your tax bill.

Bankruptcy: The Last Resort

Bankruptcy is another insolvency proceeding that may be considered when you are insolvent and have debts you cannot repay. It is a formal process where assets are used to repay creditors. HMRC may make you bankrupt if you owe a significant amount in unpaid taxes.

HMRC’s Approach: What to Expect When You Owe Money

When you owe money to HM Revenue and Customs (HMRC), it is essential to understand their approach. HMRC is known for being stringent when it comes to recovering the money owed to them. They can take various steps to recover outstanding debts, including penalties and legal action if you do not pay your tax arrears.

The Consequence of Unpaid Tax: HMRC’s Powers

HMRC may use several methods to recover outstanding debts. They can directly deduct money from your bank or building society account, seize assets, or even proceed with legal action. These actions make it imperative to address your HMRC debt as soon as you are aware of it.

Debt Relief Order (DRO): A Possible Way Forward

A Debt Relief Order (DRO) is another option that might be suitable for some individuals. DROs are designed for those with very low income and few assets, providing a way to have your debts written off. To be eligible for a DRO, your disposable income must be low, and you must not own property. You may wish to consult with a money adviser or citizens advice service to determine if a DRO is right for you.

Dealing with VAT and Corporation Tax

If you are self-employed or run a business, owing VAT and Corporation Tax can be a significant burden. HMRC may allow for a payment plan or even a Time to Pay arrangement for these specific tax types. It is crucial to contact HMRC directly to negotiate these terms.

Understanding Your Options: The Various Routes Available

When you’re facing insolvency due to HMRC debt, it is essential to be aware of several options. From Debt Relief Orders (DROs) to payment plans and voluntary arrangements, there is a way to repay HMRC that suits your circumstances. Knowing these various options can help you make an informed decision on the way forward.

What if HMRC is Your Only Creditor?

In cases where HMRC is your sole creditor, they may be more willing to negotiate a payment plan or arrangement. They may also be more inclined to grant a Time to Pay arrangement if they believe you are taking steps to resolve your HMRC tax debt.

Final Thoughts: Don’t Ignore HMRC Debt

Ignoring your HMRC debts is not an option. The consequences of unpaid tax bills can be severe, including legal proceedings and asset seizures. The sooner you address your debt, the more manageable your situation will become.

The Importance of Professional Guidance: Why You Should Seek Help

Whether you opt for a formal insolvency procedure or negotiate directly with HMRC, professional guidance can be invaluable. From insolvency practitioners to money advisors, experts can help you navigate the complexities of insolvency proceedings, giving you the best chance to resolve your debts.

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Frequently Asked Questions

HMRC debt treatment in insolvency situations refers to the actions taken by Her Majesty’s Revenue and Customs (HMRC) when someone or a business is unable to pay their tax bill due to bankruptcy, insolvency, or other financial difficulties. HMRC can take steps such as freezing bank accounts, making payment arrangements with debtors, and taking action against third parties who owe the debtor money.

There are various organisations that offer free advice for those dealing with insolvency and tax debt. You can get help from Taxaid, Citizens Advice and Gov.uk, or you could consult an accountant like Jack Ross about your options. It’s important to seek the right advice before taking any action.

If a business has made payments without valid authorisation while it is insolvent or on the brink of becoming so then these payments may be subject to legal action by HMRC. This means they may have to be repaid, unless the person making them can prove that they acted reasonably.

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Intricate Financial Investigations? Unlock the Clarity You Need.
When legal cases hinge on financial intricacies, you require more than just an accountant — you need a forensic expert. At Jack Ross Chartered Accountants, we are forensic accounting experts. We have decades of specialised experience including court attendance. Our forensic accountants stand at the intersection of law and finance, ensuring your case is built on solid financial ground.

Give your case the forensic edge it deserves. Get in touch with Jack Ross Forensic Accountants now by completing this form