Income tax debt

 July 2017

Fact sheet no. BDL12

This fact sheet tells you about how to deal with income tax arrears owed to Her Majesty’s Revenue and Customs (HMRC). It explains your rights and the options you have.

Use this fact sheet to:

  • deal with an income tax demand;
  • ask HMRC for more time to pay income tax arrears;
  • find out when HMRC can add interest and penalties to what you owe;
  • find out what action HMRC can take to recover income tax arrears; and
  • complain about HMRC if you have been treated unfairly.

Types of tax

Taxes are dealt with and collected by HM Revenue and Customs (HMRC).  There are different types of tax, which include those listed below.

  • Income tax.  This is a tax you pay on income you receive.
  • National Insurance contributions (NICs).  These are paid to build up your entitlement to certain state benefits.
  • Pay As You Earn (PAYE).  HMRC uses this system to collect income tax and NICs from someone’s income at source if they work for an employer.  If people work for you, you will have to take income tax and NICs from their earnings at source and pay this to HMRC.
  • Value Added Tax (VAT).  This is a tax that is charged on most goods and services which certain businesses provide.

Tax debts should be treated as priority debts. This is because HMRC have strong powers to collect the money from you.

For information on the rules about other types of tax, contact us for advice.

How HMRC works out what income tax is owed

The tax year runs from 6 April in one year to 5 April the following year. You need to send HMRC an income tax return for each tax year. This gives details of your circumstances and the money that has come into, and gone out of, your business.

Information:

mistakes on tax returns

If you have sent in your return but you think you made a mistake on it, or missed some information off, you may still be able to sort it out. You usually have 12 months from the tax return deadline to correct the mistake. Contact us for advice.

The deadline for sending in your income tax return depends on how you send it in.  If you send it in by post, the deadline is usually 31 October each year.  If you send in your income tax return over the internet, the deadline is usually 31 January each year.

Your tax return enables HMRC to work out how much tax you need to pay.

You should put aside a regular amount each month to help pay your income tax bill when HMRC calculates it. To help you work out what you should put aside, you can complete a budget. Our self-help pack includes guidance on completing a budget. Contact us for a copy.

Dealing with an income tax demand

Warning:

do not ignore a demand

Do not ignore a tax demand. If you do, legal action could be taken against you. This could put your business and any assets that you own at risk.

Your income tax bill for a particular tax year has to be paid by 31 January following the end of that tax year. An income tax demand is sent when you do not pay your income tax on time. The demand will show the amount of income tax HMRC state you owe, plus any interest and penalties. Whenever you receive an income tax demand, check whether it can be reduced or challenged.

Ask yourself the following questions.

  • Did you send in your income tax return? If not, the income tax demand will be for an estimated amount. This is often called a ‘determination’. The only way you will be able to challenge it will be to make sure that you send in your income tax return with the correct figures. See the next section Returns for more information.
  • If you did send in the income tax return that the bill is based on, did you complete it correctly? For example, did you leave something out that you now realise you should have included? Or did you include a wrong amount and now need to correct it? You may still have time to correct any mistakes. Contact us for advice.
  • Did you make sure that you made full use of tax allowances to reduce your tax bill? If you are not sure what tax allowances you can get, you will need further professional advice. Contact us for advice about how to get the professional help that is right for you.
  • Have any interest and penalties been correctly charged? See the later section Interest and penalties for more information.

Extra advice:

errors on tax returns

If there are mistakes in your tax return, the amount HMRC calculates you owe could be wrong. Also, some types of errors in your tax return can lead to penalties being added to your debt. Contact us for advice.

  • Is an appeal possible? Appealing an income tax decision by HMRC can be complicated. You can get more information about income tax appeals from the HMRC website www.gov.uk/tax-appeals. Alternatively, contact us for advice.
  • Have HMRC staff correctly processed all payments and information?
  • Has HMRC made an error in sending the income tax demand?

Returns

HMRC will not agree to any payment arrangements or negotiations unless you have sent in your income tax return. You must do this as soon as possible. You will be out of time to send in your return four years after the date when it should have originally been sent in.

If you have an income tax bill for an estimated amount, the rules about how long you have to send in your return are different. You have:

  • three years from the original deadline for sending in your tax return; or
  • 12 months from the date of the determination;

to send it in (whichever is later). Contact us for advice. If you are outside these timescales, you may be able to claim ‘special relief’. See the next section Special Relief for more information.

If you are having difficulty with your tax return and are on a low income, you may be able to get help from TaxAid. TaxAid is an independent charity that specialises in giving tax advice. See Useful contacts towards the end of this fact sheet.

Special relief

Extra advice:

further action

Ask HMRC to stop further action against you whilst they consider your request for special relief.  However, HMRC does not have to agree to do this.

If you have missed the deadline for sending in your tax return to replace an estimated income tax bill, you may be able to claim ‘special relief’.

There is no time limit for claiming special relief. ‘Special relief’ is a scheme that was introduced on 1 April 2011. It allows HMRC to choose not to pursue their legal right to recover an estimated income tax debt. HMRC will consider giving special relief if:

  • they believe it would be clearly unreasonable to recover the estimated debt;
  • your income tax affairs are up to date, or you have made an arrangement to bring them up to date; and
  • you have not previously made a similar request to HMRC.

Send your request to the office recovering the debt and explain your reasons fully. HMRC should tell you what information is required to make a decision about your claim.

If your request for special relief is successful, you should be able to give HMRC information about your income and outgoings for the tax year in question. You will be expected to pay any remaining debt that is due in full. If your request is refused, you can appeal. See the earlier section How to deal with an income tax demand for details of how to find out more information about appeals.

The rules about special relief are complicated. Contact us for advice.

HMRC delay

Information:

appealing an A19 refusal

If HMRC refuses your request under Extra Statutory Concession A19, you can appeal. Contact us for advice.

You may be able to ask for your income tax arrears to be written off if HMRC has not made prompt and correct use of the information you have given them. This request can be made under ‘Extra Statutory Concession A19’. To use Extra Statutory Concession A19, you usually need to show that you reasonably believed your income tax affairs were in order and:

  • you were told about the arrears more than 12 months after the end of the tax year in which HMRC received the information from you; or
  • HMRC told you about an ‘over-repayment’ after the end of the tax year following the year in which the repayment was made to you. An over-repayment is where HMRC have previously refunded you too much tax.

In very limited circumstances, arrears of tax that you were told about 12 months or less after the end of the tax year concerned can be written off by HMRC. This may be done if HMRC:

  • failed more than once to make correct use of information you gave them about one of your sources of income; and
  • allowed the arrears to build up over two consecutive whole tax years by failing to make correct and prompt use of information you gave them.

Can I ask HMRC not to pursue my debt in other situations?

HMRC may consider a request for them not to pursue you for an income tax bill in other circumstances. This is sometimes known as HMRC ‘remitting’ the debt. You will usually need to show that:

  • you have very little or no spare income after your essential household bills and this is likely to continue for a long time; and
  • you have no assets which could be sold to raise money to help clear the debt.

For example, these circumstances may apply if you:

Information:

individual cases

HMRC does not remit debts very often, but they should consider requests on a case by case basis.

  • are elderly;
  • have a disability or long-term illness; or
  • are long-term unemployed. 

HMRC will not formally write off a tax debt in these circumstances, but may agree not to pursue it based on your circumstances. This still allows HMRC to pursue the debt if your situation improves.

Can I ask HMRC for more time to pay?

Remember:

send in your tax returns

HMRC will not agree to any payment arrangements or negotiations unless you have sent in your outstanding income tax returns.

‘Time to pay’ is an arrangement to pay your tax bill back in instalments after the date it should have originally been paid. Ask HMRC for time to pay if:

  • the tax demand cannot be challenged;
  • you do not have grounds to ask for it to be remitted; and
  • you cannot afford to pay it straight away.

Contact HMRC Business Payment Support Services helpline as early as possible. See Useful contacts towards the end of this fact sheet. They are more likely to accept an arrangement before further action takes place. Making a payment arrangement helps to avoid ‘penalties’ being added to your bill. See the later section Interest and penalties for more information. Tell HMRC that you have received advice from Business Debtline. This can help to show that you have been taking steps to deal with your debts fairly.

HMRC will ask for details of your income and outgoings when discussing time to pay. It is important to show that you are not refusing to pay, but that you cannot pay in full immediately. Useyour budget to show this and to work out how much you can afford. 

You should also give HMRC the following information.

Extra advice:

be prepared

Have all this information ready when you contact HMRC. You will also need to provide your tax reference number, full address details of your business and a contact telephone number.

  • Details of how long the offer you have made is for (for example, 3 – 6 months).
  • The reasons why the debt has come about (for example, ill health, loss of customers and so on).
  • The date you propose to start making the payments you have offered.
  • Your preferred payment method.
  • Any payments you are able to make as a goodwill gesture.
  • An explanation of whether any of your assets are going to be used to help pay the debt. If you do not have any assets, this may make negotiating with HMRC easier. This is because HMRC will be more limited in the ways in which they can recover the money from you. See the later section Enforcement for more information.
  • Any form of unsecured finance that you can raise to clear the debt. You will usually need to provide evidence of a creditor agreeing to lend you the money. Before taking out further credit to deal with a debt to HMRC, check to make sure that you can afford the repayments and contact us for advice.

What should HMRC do with my request?

Under the ‘HMRC Charter’ your case should be dealt with sympathetically, fairly and promptly. You can mention this in any request you make for time to pay. For more information, see the later section What service should HMRC provide?.

You may want to follow up your conversation with HMRC Business Payment Support Services by sending details of your offer through the post, along with all the information described earlier in this section.

Information:

Debt Management and Banking Manual

HMRC staff use a Debt Management and Banking Manual to help them make decisions.   There is a section of this manual that contains information about time to pay arrangements.  It can be helpful to look at this when preparing the proposal that you will put to HMRC. To find the manual, see www.gov.uk/government/publications/debt-management-and-banking-manual

Extra advice:

keep copies and make notes

When contacting HMRC in writing, keep copies of the letters you have sent and received. When making contact with HMRC by telephone, record:

  • the name and title of the person you speak to;
  • the time and date you spoke to them;
  • brief details of what was said; and
  • details of what was agreed.

When HMRC consider requests for time to pay, they should take into account:

  • why you are in difficulties;
  • what assets you have; and
  • the length of time your offer will take to clear the debt. 

If your business is still trading, HMRC will expect you to offer a payment that will include your arrears and future bills.  They will usually expect you to be completely up to date as soon as possible, but extra time may be given depending upon your circumstances.

Information:

self-help pack

Our self-help pack includes further guidance on completing a budget and how to negotiate with creditors. Contact us for a copy.

  • Up to three months may be given in straightforward cases.
  • If you need more than three months, HMRC will require extra information from you about your income, outgoings and circumstances before they decide your request.
  • Rarely, HMRC may give you up to three years to pay. This is only done where your circumstances are exceptional. Contact us for advice.
  • All requests should be considered on a case-by-case basis and your previous payment history will be taken into account.

Interest and penalties

If you send in your income tax return late, or pay the debt late, penalties can be added onto what you owe. See Penalties for missing the income tax deadline at the end of this fact sheet for more information.

HMRC will not add penalties to your debt where a time to pay arrangement is made before the penalties would have been applied, as long as you keep to the arrangement.

If you pay your income tax bill late, you will have to pay interest on what you owe. The amount you owe includes any penalties that have been added. From 23 August 2016, interest will be charged at 2.75%.

Enforcement

Warning:

your tax code

If you are currently working for an employer, HMRC may try to recover the money by changing your tax code. This allows them to recover the debt from your wages before you get them. If you think HMRC are trying to do this, contact us for advice.

If you do not reach an agreement with HMRC to repay what you owe, your case will be transferred to your local office. The office will consider different ways of recovering the debt from you.

You should still try and negotiate with HMRC and make an offer to pay, if you have not already done so. It is good practice to start paying what you have offered straight away. You can use the same ways of negotiating as described in the earlier section Dealing with an income tax demand. If you have previously been refused time to pay, but your circumstances have now changed, tell HMRC this. If you are not given time to pay, they may consider taking the following types of action.     

Debt collection agencies

HMRC may pass your debt to a debt collection agency.  A debt collection agency is a private company that can ask you to pay what you owe. They will generally contact you by phone or post. It is usually best to negotiate with them in writing.  Send them a copy of your budget to show what you can afford to pay.

Sometimes debt collectors may visit your home or business premises. However, they are not bailiffs and have no right to force entry. Also, they cannot take your goods away from you.

Bailiff action 

Warning:

entry to business premises

It may be very difficult to stop the collector entering your business premises if it is open to the public.

HMRC does not need a court order to take bailiff action against you. This type of action is known as ‘taking control of goods’. The ‘Collector of Taxes’ is the HMRC employee responsible for taking control of goods and may occasionally be accompanied by a certificated bailiff.

Bailiffs are also commonly known as enforcement agents. In this fact sheet we use the term bailiff. 

HMRC will usually attempt to gain entry to your premises peacefully. You do not have to let them in to your premises. However, HMRC can apply to court for a warrant to break in. The court makes the final decision on whether to give HMRC this warrant. The court will look at whether it is reasonable to allow HMRC to force entry, taking into account the size and type of debt you owe.

Information:

where goods can be taken from

The collector can try to take goods from either your business premises or your home. The collector can remove a vehicle if it is parked on your own driveway or on a public road. They cannot remove a vehicle on third party premises (for example, someone else's driveway or a private car park) unless they have a court order allowing them to do this.

If the Collector of Taxes gains entry, they will usually list items and ask you to sign a ‘controlled goods agreement’. This allows you to keep using the goods listed. However, if you do not pay, the goods listed on the controlled goods agreement can be removed. The bailiffs can break into your premises to do this, but they must give you two clear days’ notice if they want to break into your home. ‘Clear days’ do not include Sundays or bank holidays.

In some situations, your goods may be removed straight away or locked up in a room on your premises. As a last resort your whole business premises may be locked up. You should try to agree affordable payments by instalments, based on your budget

HMRC bailiffs should not take:

Extra advice:

exempt goods

Goods that bailiffs are not allowed to take include: 

  • a cooker or microwave
  • a refrigerator
  • a washing machine
  • a dining table and chairs for you and your household.

This is not a complete list of the goods that bailiffs should not take. If you unsure whether an item is exempt or not, contact us for advice.

  • clothing, bedding, furniture and basic household items that are necessary for the basic domestic needs of you and your family;
  • items you or someone else is physically using where taking the goods is likely to lead to a breach of the peace (this will normally only apply if the collector wants to remove the item straight away); and
  • items belonging to other people, including rented and leased goods.

There are different legal views about whether bailiffs can take control of goods on hire purchase or conditional sale agreements. If a HMRC bailiff threatens this, contact us for advice.

HMRC can take goods that are necessary for you to use in your business.

Goods that are removed can be sold seven clear days later, unless you make an arrangement to pay with HMRC.

What if there are no goods to take?

If the bailiffs come into your business premises or your home, they may decide that your goods are not worth enough to cover the cost of them coming with a van to remove and sell them.  If this is the case, the bailiff may return at a later date to try to take control of your goods. They have 12 months from the date of the enforcement notice to take control of your goods.

If in the meantime you make an arrangement to pay the bailiff, and you do not pay, the 12 month time period starts running again from the date you missed the payment.

Direct deductions from bank accounts

If you owe HMRC at least £1,000 they can ask your bank whether there is any money in your account to pay the debt. HMRC will normally be able to do this 30 days after you have had a letter from them telling you how much you owe. This can be done without a court order. However, HMRC guidance says that you should have had a visit from them first, to make sure that you do know that you owe the debt.

HMRC will send you a hold notice, telling you that the bank has frozen money in your account. In most cases the first £5,000 in your account is protected, and the bank will only freeze any funds above this amount.

HMRC will then send you a deduction notice, advising how much they have asked the bank to pay them out of your account. The bank will send this money to HMRC. The bank can also make a charge to your account for carrying out this process. If you are unhappy about the amount of charges, contact us for advice.

Information:

objection

If you do not agree that HMRC should make the deduction; for example, because the debt has already been paid, then you can object to HMRC. Contact us for advice.

Extra advice:

joint accounts

HMRC can ask for money to be taken from a joint account. Only money in the account belonging to the person who owes the debt can be taken. However, HMRC will assume that balances in joint accounts are split equally. For example, if the account is in two names, and only one person owes the debt, HMRC will say 50% of the money in the account can be taken.

County Court procedures 

HMRC may make a claim through the County Court to get a county court judgment (CCJ) against you. This may be done if bailiff action is not successful. A CCJ will be recorded on your credit reference file for six years and can affect your ability to get further credit.

  • When county court action is taken against you, you will get a ‘claim form’. This gives details about the debt and tells you how much is being claimed.
  • You can complete the ‘admission’ form if you admit the debt and want to make an offer to pay the debt in instalments.
  • If you want to dispute all or part of the debt, contact us for advice.

The County Court should consider your circumstances and your income and outgoings before making a decision about how the debt should be paid back. The final decision about how much you should pay back each month is taken by the court, even if HMRC wants a higher amount.

See our fact sheet:

County Court - charging orders.

If HMRC applied for a CCJ against you on or after 1 October 2012, they can apply to secure the debt against any property you own, even if you have not missed payments on the CCJ. If HMRC applied for a CCJ against you before 1 October 2012, the rules are different. Contact us for advice.

If you miss payments on a CCJ, HMRC can take other types of enforcement action against you through the County Court, which could include:     

  • freezing money in your bank account (called a ‘third party debt order’);
  • using bailiffs to take control of your goods;
  • taking regular deductions from your wages, if you are working for an employer (called an ‘attachment of earnings order’); and
  • applying to court for a ‘judgment summons’ (see the section Judgment summons below).

Judgment summons

The court can issue a ‘judgment summons’ for you to go to court and explain why you have not paid. If HMRC does this, you can be sent to prison if you:

  • have had the money to pay the amount of the judgment summons since the CCJ was made; and 
  • have wilfully neglected or refused to pay as the court ordered.

In practice, HMRC does not use this procedure very often.

Magistrates’ court action

If you owe less than £2,000 on income tax, in some situations HMRC could recover the debt through the magistrates’ court. The process is called ‘summary proceedings’, but is not used very often. HMRC has 12 months to start summary proceedings once the debt is due.

Warning:

bailiff action

If you do not pay, magistrates’ court bailiffs could be used to collect the debt. Magistrates’ court bailiffs can force entry to your home to remove goods, but this should only be done as a last resort and when it is reasonable. Contact us for advice.

You will receive a magistrates’ court summons to go to a hearing. Try to make an arrangement to pay with HMRC. If this is agreed, the magistrates’ court may accept this at the hearing. If you are unable to go for a very good reason such as illness, see if the collector will ask the court to give you more time by delaying the hearing.

Take any evidence of recent payments with you to the hearing. You can ask the magistrates’ court for time to pay the debt back in instalments that you can afford. Take your budget together with proof of your income to the hearing

Bankruptcy proceedings

If HMRC has been unable to recover the debt by other methods, they will pass the debt to the Enforcement and Insolvency Service office in Worthing. Once the debt reaches this stage, HMRC may try to make you bankrupt if the debt you owe is at least £5,000. Bankruptcy is a court order which means that valuable things you own (your ‘assets’) could be sold to help pay your debts.

See our fact sheet:

Statutory demands.

You would usually receive a ‘statutory demand’ before being made bankrupt. This is a legal document which shows what HMRC claim you owe. 

Even at this stage, you can still try to negotiate a payment arrangement. If you have a lump sum of money to offer, you could try to offer this to HMRC as well as instalments that you can afford, based on your budget.

If HMRC still refuses to accept the offers you make and you own your home, you could consider offering to secure the debt on your property. If the debt is secured against your property, this would mean that the debt will be paid when the property has been sold. This may help to persuade HMRC not to make you bankrupt. If you are ill and can only make very small payments, or none, explain this to HMRC. If you are considering this option, contact us for advice.  

What service should HMRC provide?

HMRC have a service commitment laid out in a Charter (called the ‘HMRC Charter’) which includes the following commitments.

HMRC will act ‘fairly and impartially’ by:

  • treating your affairs in strict confidence within the law.

HMRC will ‘communicate effectively’ by:

  • providing clear and simple guidance; and
  • giving accurate and complete information.

HMRC will provide ‘good quality service’ by:

  • handling your affairs promptly and accurately;
  • being accessible;
  • keeping your costs to a minimum;
  • helping customers with special needs; and
  • being courteous and professional.

How to complain

If you are unhappy with the way HMRC has dealt with your case, there is a complaint procedure that you can follow.

You may want to complain if you have been refused time to pay your arrears and you feel that this is unreasonable in view of your circumstances.

  • You should first contact the HMRC office that has been dealing with your case. If you are not happy with the response, your complaint will usually be passed to a ‘complaints handler’. HMRC accept complaints by telephone and in writing.
  • If you are still not happy with the response, you can ask HMRC to look at your case again. They will usually ask a different complaints handler to consider your case.

Information: 

contacting HMRC

Details of how to contact HMRC to make a complaint can be found on their website, www.gov.uk/complain-to-hm-revenue-and-customs.

  • After going through these steps, if you are still not happy you can contact the Adjudicator’s Office at the address given towards the end of this fact sheet. The Adjudicator is not part of HMRC and they can act as an impartial referee in unresolved complaints.
  • If you are not happy with a decision that HMRC has made, such as the amount of tax you owe, or the charges they have asked you to pay, you may need to follow the review and appeals process instead of complaining. Contact us for advice.

Useful contacts

TaxAid
Phone: 0345 120 3779 Mon – Fri 10am – 12 midday
www.taxaid.org.uk

HMRC Business Payment Support Helpline for Time to Pay
Phone: 0300 200 3835 Mon – Fri 8am – 8pm, Sat – Sun 8am – 4pm
www.gov.uk/difficulties-paying-hmrc

The Adjudicator’s Office
Phone: 0300 057 1111
www.adjudicatorsoffice.gov.uk

Chartered Institute of Taxation
To find a tax adviser for tax advice and help.
www.tax.org.uk

Institute of Chartered Accountants in England and Wales
Find a Chartered Accountant.
www.icaew.com

Penalties for missing the income tax return deadline

​Delay ​Penalty you will have to pay
​At least 1 day

​£100

You will still have to pay this, even if HMRC work out that you don't owe any tax, or if you pay the tax they say you owe.

At least 3 months

​£10 for each day up to a maximum of £900.

For example, if HMRC receive your return 3 months and 6 days after the deadline, this charge will be £60.

This penalty will be added as well as the fixed penalty above.

​At least 6 months

​£300 or 5% of the income tax due, whichever is higher.

This penalty will be added as well as the penalties above.

​At least 12 months

£300 or 5% of the income tax due, whichever is higher.

In some serious cases, this penalty may be 100% of the tax due instead.

This penalty will be added as well as the penalties above.

Penalties if you pay your income tax late

​Delay ​Penalty you will have to pay
​30 days 5% of the income tax you owe at that time.
​6 months ​5% of the income tax you owe at that time, which includes the penalties above.
​12 months 5% of the income tax you owe at that time, which includes the penalties above.