Income tax debt

 December 2017

Fact sheet no. BDL06 SCOT Income tax debt

This fact sheet tells you about how to deal with income tax arrears owed to HM 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.

This fact sheet includes some useful contacts and links for you to get further help.

Types of tax

Taxes are dealt with and collected by 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.

This fact sheet explains what you can do if you cannot pay your income tax bill. For information on the rules about other types of tax, contact us for advice.

How does HMRC work out how much income tax I owe?

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.

The deadline for sending in your income tax returns 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.

Information:

mistakes on tax returns

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

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 need to work out a budget. Our self-help pack includes guidance on completing a budget. Contact us for a copy.

How should I deal 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 that 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 find more information about income tax appeals from the HMRC website www.hmrc.gov.uk. 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:

  • 3 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 you 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

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’.

Special relief is a scheme that was introduced on 1 Apr 2011. It allows HMRC to choose not to pursue their legal right to recover an estimated income tax debt. There is no time limit for claiming special relief. 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.

Extra advice:

ask HMRC to stop 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.

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 should I 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

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:

Information:

appeals

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

  • 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 paying 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 they reach the stage of taking further action. 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. 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. Use your budget to show this and to work out how much you can afford.

What information should I give to HMRC?

You should also give HMRC the following information.

  • Details of how long the offer you have made is for (for example, 3 to 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.

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.

  • 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 I expect when dealing with HMRC?.
  • 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 letters you have sent and received. When making contact with HMRC by phone, 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.
         

How do HMRC make decisions?

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

  • why you are in financial 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 on to 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 21 November 2017, interest will be charged at 3%.

Recovery action

Warning:

changes to 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 for an income tax debt you owe, 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 tax 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 How should I deal 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 usually 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 sheriff officers and have no right to force entry. Also, they cannot take your goods away from you.

Summary warrant

HMRC will apply to the sheriff court as soon as possible after the date of the demand letter for a ‘summary warrant’. A summary warrant is a court order which confirms how much you owe. It allows HMRC to take further steps to recover your debt.

Once a summary warrant is granted, HMRC must serve you with a ‘charge for payment’. This is a formal request in writing, demanding that you pay a debt within a certain period of time, usually 14 days. If the debt is not paid in this period of time, HMRC can use ‘diligence’ to recover their money. Diligence is a technical term for debt enforcement in Scottish law.

Types of diligence that might be used include:

  • freezing your bank account (called a bank arrestment);
  • removing items from outside your home or inside your business (called an attachment of non-domestic property);
  • removing items from inside your home (called an exceptional attachment order (EAO);
  • preventing you from selling land or property such as your home (called an inhibition); or
  • taking money from your wages if you are employed (called an earnings arrestment).

There is no court hearing needed to obtain a summary warrant so it is difficult to challenge a summary warrant for income tax arrears. However, in most cases HMRC are willing to negotiate a settlement and you can still make an offer to pay before diligence is started.

Sheriff court decree

HMRC may also apply to the sheriff court for a ‘decree’ (court order) against you for the debt. HMRC must send you a charge for payment in the same way as a summary warrant, before they can use most types of diligence. A decree will be recorded on your credit reference file for six years and can affect your ability to get further credit.

  • When HMRC apply for a decree you will get notice from the sheriff court.
  • How long you have to respond and the different ways you can respond depend on how much you owe.
  • If you want to dispute all or part of the debt, contact us for advice.

You do not have the option of offering the court instalments. HMRC can use the same kinds of diligence as when you do not pay a summary warrant. You may still be able to negotiate a settlement figure with HMRC and you can also offer instalments to them directly before diligence starts. Contact us for advice.

Bankruptcy (sequestration)

If HMRC have been unable to recover the debt in any other way, they will pass the debt to the Enforcement and Insolvency Service office. Once the debt reaches this stage, HMRC may try to make you bankrupt if you owe at least £3,000. Bankruptcy is a court order which means that valuable things you own (your ‘assets’) could be sold to help pay your debts.

To make you bankrupt HMRC must have sent you a copy of the Scottish Government’s Debt Advice and Information Package. They also have to prove that you have become apparently insolvent within the last four months. To get to this stage HMRC will be likely to have served on you:

  • a ‘charge for payment’; or
  • a ‘statutory demand’.

See our fact sheet:

Bankruptcy.

The time limit for you to reply will also need to have run out. The time limit to reply is normally 14 days for a charge for payment and 21 days for a statutory demand.

Even at this stage it may be possible to negotiate a payment arrangement. If you have a lump sum or money to offer, you could try to offer this to HMRC as well as the instalments that you can afford, based on your business and household budget sheet.

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, it would mean that the debt will be paid when the property is 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.

Debt Arrangement Scheme (DAS)

Information:

further action

A debt payment programme will give you protection against your creditors making you bankrupt, or forcing you to pay your debt by using diligence.

You can get protection to prevent your creditors from forcing you to pay your debt, even before a DAS is approved. For example, if one of your creditors tries to make you bankrupt while you are waiting for your debt payment programme to be approved. Contact us for advice.

You may benefit from applying for a debt payment programme under the Debt Arrangement Scheme. If you are successful in applying for a debt payment programme, you will make one regular payment to cover most of your debts. This is made to an approved payments distributor who will send the money to your creditors for you. If you keep to the agreed payments, your creditors will not be able to use diligence against you.

Once your debt payment plan is applied for, interest and charges are frozen. They will be written off if you keep to the debt payment programme, but if it is cancelled (for example, because you have not kept up with the payments) interest and charges could start to apply again. Interest and charges that had been frozen could also be added back onto the debt. For more advice about DAS and the protection you can get, contact us for advice.

See our fact sheet:

Debt Arrangement Scheme (DAS).

What service should I expect when dealing with HMRC?

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 complaints 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.
  • After going through these steps, if you are still not happy you can contact the Adjudicator’s Office at the address 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. 

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

Alternative dispute resolution

HMRC runs an alternative dispute resolution (ADR). This involves independent HMRC 'facilitators' working with both you and HMRC to sort out disputes quickly and cheaply. You can use ADR if you are a small business and there is a tax issue in dispute. Using the ADR process will not affect your review and appeal rights. Contact us for advice.

Useful contacts

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

HMRC Business Payment Support Helpline for Time to Pay
Phone: 0300 200 3835
Monday to Friday 8am to 8pm, Saturday to Sunday 8am to 4pm
www.gov.uk/government/organisations/hm-revenue-customs  

Institute of Chartered Accountants of Scotland
Find a chartered accountant.
www.icas.com

TaxAid
304 Linton House
164 to 180 Union Street
London
SE1 0LH
Phone: 0345 120 3779
Monday to Friday 10am to 12 midday
www.taxaid.org.uk

The Adjudicator’s Office
PO Box 10280
Nottingham
NG2 9PF
Phone: 0300 057 1111
www.adjudicatorsoffice.gov.uk

 

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.