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Business Tax  •  Personal tax

How to manage a tax debt with HMRC

By RJP LLP on 26 April 2022

One of the legacies of the Covid-19 disruption is tax debt – the difference between your agreed tax liabilities and the amount you have actually paid to HMRC. Tax debt is different to the tax gap, which is the tax revenue lost through fraud, tax avoidance and accounting errors, but just as significant.

Government estimates have suggested that the value of tax debt was around £39 billion in December 2021 and is likely to rise further now that interest rates are creeping up and taxes are also increasing. Income tax is higher due to increased NICs and the freeze to personal allowances, plus there is the new Health and Social Care Levy. This will add to the existing debt mountain.

Although the government is very interested in minimising all tax revenue shortfalls, tax debt is the least onerous for taxpayers and there are ways to soften the impact. HMRC offers a ‘Time to Pay’ scheme, which allows taxpayers to clear what they owe in manageable instalments. This is a very helpful, light touch facility, but it needs to be approved by HMRC in advance.

Now is a critical time to take action if you have tax debt that you haven’t dealt with already, because the different measures offered by the government to help taxpayers through difficult times are coming to an end. If you have not already put Time to Pay arrangements (TTPA) in place this should be done as soon as possible. Otherwise, you may be at risk of criminal prosecution and will most likely end up paying a lot more than the original debt.

HMRC’s help measures that have been in place giving taxpayers extra leeway are as follows:

Deferral of VAT for business owners
VAT payments could be deferred between 20 March 2020 and 30 June 2020, initially to 31 March 2021 and then to 31 March 2022. This instalment period is now over and VAT debts need to be repaid.

Extra time to pay for hospitality and leisure businesses
Due to the rising impact of omicron HMRC gave businesses in the hospitality and leisure sectors further payment flexibility, which was offered on a case by case basis.

Deferral of income tax surcharge
Normally if Self Assessment tax is paid after the 31 January deadline, a 5% surcharge is automatically applied. This was waived for a second year after the January 2022 deadline provided that full payment was made by 1 April 2022. Interest remained chargeable from 1 February 2022 onwards.

Suspension of enforcement action
HMRC suspended its normal debt collection activities and enforcement powers until the end of September 2021, which meant no forced insolvencies or court actions. This is no longer the case and debt collection enforcement is operational again.

Taxpayers who are unwilling to discuss their debts, have not agreed a TTPA, or who have ignored HMRC’s attempts to contact them could be risking the following:

• HMRC taking control of valuable goods;
• Indirect tax collection through harsher coding notices;
• Direct recovery of debts from your bank and building society accounts;
• Receiving a joint or several liability notice, which makes directors and LLP members
• liable for certain tax debts;
• HMRC issuing a notice of requirement to give security for tax debts; and in extreme cases,
• Forced bankruptcy/insolvency proceedings.

Actions are already being taken now by HMRC as a precursor to the enforcement proceedings. For example, Field Force agents have been visiting businesses that have tax debts owing following the pandemic, and over 110,000 visits have been conducted in the past 12 months.

Reports have so far indicated that these visits are relatively innocuous and focused on making sure that taxpayers were aware of their debt, the support options available and to ascertain ability to pay. But it is only a matter of time before things become more challenging, as HMRC needs to recover a lot of financial support provided during the pandemic.

If you are reading this article because you have tax debt and you have not already put in place a TTPA, you may still be able to use the online facility for some tax debts. This is intended for Self Assessment taxpayers owing less than £30,000 and is available provided the application is made within 60 days of the payment deadline and provided the debt can be cleared over a period of 12 months. If you have older debts, it will be necessary to approach HMRC directly and make a voluntary disclosure.

Assuming you can still negotiate a TTPA, this will stop any further enforcement action by HMRC, provided you stick to the payment terms. It is always better to proactively approach HMRC to discuss the payment of tax debt and a timescale, as you will most likely benefit from better terms than if you avoid the conversation and hope that it goes away.

Getting ready to agree a Time to Pay Agreement with HMRC

If you do contact HMRC, be ready to discuss the following with them:

1. Extent of your financial hardship and impact of Covid-19;
2. Funding options you have explored to pay your tax debts e.g. loans, re-mortgaging, shareholder contributions;
3. Assets that can be sold to pay the tax debt;
4. Future income expected or tax refunds due e.g. a business contract, VAT rebate or a successful R&D tax credits claim;
5. What you propose as a TTPA, if you can pay off a lump sum immediately and the schedule you can commit to.

You may also need to provide a monthly income/expenditure summary, or a cashflow forecast for a business.

During these discussions it is essential to only agree to a TTPA if you really can meet the payment schedule and be aware that daily interest is always charged by HMRC on any underpaid tax.

If you are concerned about a tax debt and would like some advice or support negotiating a TTPA with HMRC please contact us via partners@rjp.co.uk.

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One of the legacies of the Covid-19 disruption is tax debt – the difference between your agreed tax liabilities and the amount you have actually paid to HMRC. Tax debt is different to the tax gap, which is the tax revenue lost through fraud, tax avoidance and accounting errors, but just as significant.

Government estimates have suggested that the value of tax debt was around £39 billion in December 2021 and is likely to rise further now that interest rates are creeping up and taxes are also increasing. Income tax is higher due to increased NICs and the freeze to personal allowances, plus there is the new Health and Social Care Levy. This will add to the existing debt mountain.

Although the government is very interested in minimising all tax revenue shortfalls, tax debt is the least onerous for taxpayers and there are ways to soften the impact. HMRC offers a ‘Time to Pay’ scheme, which allows taxpayers to clear what they owe in manageable instalments. This is a very helpful, light touch facility, but it needs to be approved by HMRC in advance.

Now is a critical time to take action if you have tax debt that you haven’t dealt with already, because the different measures offered by the government to help taxpayers through difficult times are coming to an end. If you have not already put Time to Pay arrangements (TTPA) in place this should be done as soon as possible. Otherwise, you may be at risk of criminal prosecution and will most likely end up paying a lot more than the original debt.

HMRC’s help measures that have been in place giving taxpayers extra leeway are as follows:

Deferral of VAT for business owners
VAT payments could be deferred between 20 March 2020 and 30 June 2020, initially to 31 March 2021 and then to 31 March 2022. This instalment period is now over and VAT debts need to be repaid.

Extra time to pay for hospitality and leisure businesses
Due to the rising impact of omicron HMRC gave businesses in the hospitality and leisure sectors further payment flexibility, which was offered on a case by case basis.

Deferral of income tax surcharge
Normally if Self Assessment tax is paid after the 31 January deadline, a 5% surcharge is automatically applied. This was waived for a second year after the January 2022 deadline provided that full payment was made by 1 April 2022. Interest remained chargeable from 1 February 2022 onwards.

Suspension of enforcement action
HMRC suspended its normal debt collection activities and enforcement powers until the end of September 2021, which meant no forced insolvencies or court actions. This is no longer the case and debt collection enforcement is operational again.

Taxpayers who are unwilling to discuss their debts, have not agreed a TTPA, or who have ignored HMRC’s attempts to contact them could be risking the following:

• HMRC taking control of valuable goods;
• Indirect tax collection through harsher coding notices;
• Direct recovery of debts from your bank and building society accounts;
• Receiving a joint or several liability notice, which makes directors and LLP members
• liable for certain tax debts;
• HMRC issuing a notice of requirement to give security for tax debts; and in extreme cases,
• Forced bankruptcy/insolvency proceedings.

Actions are already being taken now by HMRC as a precursor to the enforcement proceedings. For example, Field Force agents have been visiting businesses that have tax debts owing following the pandemic, and over 110,000 visits have been conducted in the past 12 months.

Reports have so far indicated that these visits are relatively innocuous and focused on making sure that taxpayers were aware of their debt, the support options available and to ascertain ability to pay. But it is only a matter of time before things become more challenging, as HMRC needs to recover a lot of financial support provided during the pandemic.

If you are reading this article because you have tax debt and you have not already put in place a TTPA, you may still be able to use the online facility for some tax debts. This is intended for Self Assessment taxpayers owing less than £30,000 and is available provided the application is made within 60 days of the payment deadline and provided the debt can be cleared over a period of 12 months. If you have older debts, it will be necessary to approach HMRC directly and make a voluntary disclosure.

Assuming you can still negotiate a TTPA, this will stop any further enforcement action by HMRC, provided you stick to the payment terms. It is always better to proactively approach HMRC to discuss the payment of tax debt and a timescale, as you will most likely benefit from better terms than if you avoid the conversation and hope that it goes away.

Getting ready to agree a Time to Pay Agreement with HMRC

If you do contact HMRC, be ready to discuss the following with them:

1. Extent of your financial hardship and impact of Covid-19;
2. Funding options you have explored to pay your tax debts e.g. loans, re-mortgaging, shareholder contributions;
3. Assets that can be sold to pay the tax debt;
4. Future income expected or tax refunds due e.g. a business contract, VAT rebate or a successful R&D tax credits claim;
5. What you propose as a TTPA, if you can pay off a lump sum immediately and the schedule you can commit to.

You may also need to provide a monthly income/expenditure summary, or a cashflow forecast for a business.

During these discussions it is essential to only agree to a TTPA if you really can meet the payment schedule and be aware that daily interest is always charged by HMRC on any underpaid tax.

If you are concerned about a tax debt and would like some advice or support negotiating a TTPA with HMRC please contact us via partners@rjp.co.uk.