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Tax arrears owed to HMRC and bankruptcy

Published: 15 May 2024

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Find out what happens to tax arrears you owe to HMRC if you go bankrupt. Is this debt written off or will you still be liable to pay it? Will your bankruptcy still last just 12 months or any longer?

This guide provides all the answers you need regarding income tax arrears and VAT debt if you go bankrupt.

Contents

Can you write off personal income tax arrears with bankruptcy?

Yes. If you owe personal income tax arrears to HMRC, going bankrupt includes this debt. The process will write it off.

Tax arrears are Government debts. However, the treatment they receive is exactly the same as any other debt you owe. This is because in bankruptcy, debt owed to HMRC is not treated preferentially.

Both the tax arrears themselves and any interest or late payment charges that HMRC have added are all included when you go bankrupt. Because of this, you will get a 100% fresh start.

What if you don’t know how much tax you owe?

You may be unsure about the total amount of tax arrears you owe to HMRC. This could be because you have not done any tax returns for a number of years.

This does not matter because you can simply give an estimate of how much you owe on your application form.

Whether or not the actual amount you owe is more or less, the Official Receiver (OR) will deal with your case in exactly the same way.

Once you are bankrupt, the OR might ask you to provide any business records that you have. If you have not kept records, this will not be a significant issue.

You do not have to submit any overdue tax returns before you go bankrupt. However, if you are self employed, you must keep accurate business records as you go forward. You must submit future returns as they become due.   

Are self employed tax arrears included if you go bankrupt?

If you work for yourself and owe tax arrears to HMRC, going bankrupt will write this debt off.

The process treats tax arrears built up from self employment in exactly the same way as any other type of tax debt.

Once you are bankrupt, you can continue operating your self employed business with relatively few restrictions.

That said, it is important that you keep good business records from now on. You will have to complete and submit future tax returns to HMRC as they become due. This is because you are liable to pay the future tax that you incur after the date of your bankruptcy.

Self employed? Make sure you get advice before going bankrupt? Call us today for a free confidential chat.

Are self employed tax arrears included if you go bankrupt

Does bankruptcy write off VAT arrears?

The treatment of VAT arrears is the same as any other tax arears. You can include them. Your bankruptcy will write them off.

If you need to, you can continue to have VAT registration and charge VAT on your goods and services.

However, it is vital that you do your returns and pay any VAT due on time from the date you go bankrupt because you are liable to pay this.

Could your bankruptcy last longer if you owe tax arrears to HMRC?

You may have read that if you owe tax arrears to HMRC, the length of your bankruptcy will be extended.

This is not the case. You will still be bankrupt for just 1 year as standard.

That said, in some instances, you may have to accept a BRU (Bankruptcy Restriction Undertaking).

If you get a BRU, it is not really an extension of your bankruptcy. The process will still only last 1 year. However, there is an extension of the length of time some of the restrictions you are under as a bankruptcy person last. The mains ones are as follows:

  • The time you are barred from being a co director.
  • The time you are not allowed to borrow more than £500 without informing the lender of your bankruptcy. 

A BRU normally lasts for 3.5 years but could be longer. The maximum period is 15 years. However, this only happens in extremely rare cases

The fact that you have tax arrears does not automatically mean you will get a BRU. It only happens in particularly serious cases. For example if you have worked for yourself for a number of years but you did not submit any tax returns.

Could your bankruptcy last longer if you owe tax arrears to HMRC

What happens if you get a tax rebate after you go bankrupt?

A tax rebate is a windfall. This means that you must pay to the Official Receiver any rebate you receive from HMRC as a result of overpayment of tax which happened before you go bankrupt.

If HMRC identify that a rebate is due while you are bankrupt, they will normally sent this direct to the Official Receiver’s office. However, there is a chance they will send the funds directly to you.

Where this happens, you must make it known to the OR that you have received the rebate. You will then have to transfer it to them

Any HMRC tax rebate you are due in relation to tax you pay after your discharge from bankruptcy will be yours to keep.

   Written by James Falla

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