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Income tax debt (Scotland)

This fact sheet covers ScotlandWe also have a version for England & Wales if you need it.

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.

Coronavirus

If you, or your business, have been affected by coronavirus, also see our Coronavirus advice and help.

Scottish Income Tax

If you live in Scotland, you pay Scottish Income Tax. This is collected by HMRC and paid to the Scottish Government. This fact sheet uses the term Income tax to also mean Scottish Income Tax

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.

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.

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 the tax return deadline year to correct the mistake. Contact us for advice.

How should I deal with an income tax demand?

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.

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.

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 Interest and penalties section for more information.

  • 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?

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.

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). 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.

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.

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 April 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.

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.

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

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:

  • 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.

Appealing an A19 refusal

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

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:

  • 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.

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

Can I ask HMRC for more time to pay?

'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 as early as possible. If you haven't reached your payment deadline yet, but know that you will be unable to pay on time, contact HMRC’s Payment Support Service to discuss payment arrangements. If your payment deadline has already passed, contact HMRC’s Self Assessment Payment Helpline. See Useful contacts towards the end of this fact sheet.

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.

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

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, three to six 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 Enforcement section 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.

  • You may want to follow up your conversation with HMRC by sending details of your offer through the post, along with all the information

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.

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.

Before your payment deadline

If you have not reached your payment deadline yet, but know that you will be unable to pay on time, contact HMRC’s Payment Support to discuss payment arrangements.

How do HMRC make decisions?

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

When HMRC considers 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.

  • 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

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, go to www.gov.uk.

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. For more information on what can be added, see the following sections at the end of this fact sheet:

  • Penalties for missing the income tax return deadline; and
  • Penalties if you pay your income tax late.

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 also have to pay late payment interest on what you owe. The amount you owe includes any penalties that have been added. From 7 April 2020, late payment interest will be charged at 2.60%.

HMRC has an online tool which estimates penalties and interest for late filing and late payments under self assessment.

Recovery action

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.

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.

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); 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

As a first step, HMRC will usually consider applying for a summary warrant against you. This is because it is a quick procedure. However in some situations HMRC may make a claim for the money you owe through the sheriff court to get a ‘decree’ against you. This is a different type of court order which confirms that you owe the money. It is usually a longer procedure.

If HMRC decides to use this route, they must send you a charge for payment before they can use most forms of diligence. The types of diligence they can use include those described in the earlier section Summary warrant, as well as an 'inhibition' on the sale of property.

  • An inhibition on the sale of property, such as your house, would prevent you from selling your home or taking out further borrowing secured on it.

    A decree will be recorded on your credit reference file for six years and can affect your ability to get further credit.

  • If 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. Under temporary rules to help during the coronavirus pandemic, you must owe HMRC at least  £10,000  for them to be able to petition for your bankruptcy. This will change to £3,000 or more from 30 September 2021. 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.

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)

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.

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.

What service should HMRC provide?

HMRC should provide you with a service that is fair, accurate and based on mutual respect. They should also be mindful of your wider personal situation, and  give you extra support if you need it. This is explained in their service charter, called the ‘HMRC Charter'.

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. For example, 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 can make a complaint to HMRC by phone, online or in writing. As explained in their charter, HMRC should deal with your complaint fairly and as quickly as they can.

  • To complain, you usually need to contact the HMRC department that has been dealing with your case and explain the reason for your complaint. HMRC should investigate your issue thoroughly.
  • If you are unhappy with HMRC’s response to your complaint, you can ask for your case to be looked at again by another member of staff. They will review your complaint and send you a ‘final response’.
  • If you do not agree with the final response, you can contact the Adjudicator’s Office and ask them to look at your case. See Useful contacts at the end of this fact sheet. The Adjudicator’s Office is not part of HMRC and acts as a free impartial referee in unresolved complaints.
  • Finally, after going through all these steps, you can ask your Member of Parliament to refer your case to the Parliamentary and Health Service Ombudsman (PHSO). The PHSO is the final stage for unresolved complaints. For contact details, see Useful contacts at the end of this fact sheet.

For more information, go to www.gov.uk and search for ‘Complain about HMRC’.

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.

Alternative dispute resolution

HMRC runs an Alternative Dispute Resolution (ADR). This involves an independent HMRC mediator working with both you and HMRC to sort out your dispute. 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. For more information see HMRC guidance - Use Alternative Dispute Resolution to settle a tax debt.

Useful contacts

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

HMRC Payment Support Service Phone: 0300 200 3835 www.gov.uk

HMRC Self Assessment Payment Helpline Phone 0300 200 3822 www.gov.uk

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

TaxAid Phone: 0345 120 3779 www.taxaid.org.uk

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

Penalties for missing the income tax return deadline

DelayPenalty you will have to pay
At least 1 day£100 You will still have to pay this, even if HMRC works 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 receives 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

DelayPenalty you will have to pay
30 days5% of the income tax you owe at that time.
6 months5% of the income tax you owe at that time, which includes the penalties above.
12 months5% of the income tax you owe at that time, which includes the penalties above.

Other fact sheet that may help

The following fact sheets may help you to understand some of the information in this fact sheet.

Bankruptcy fact sheet

Business debt Arrangement Scheme (BDAS fact sheet

Coronavirus advice and help

Debt Arrangement Scheme (DAS fact sheet)

Diligence fact sheet