Facing HMRC debt can be a source of immense stress for individuals and businesses alike due to the serious consequences that can arise. HMRC is the UK's tax authority responsible for collecting various taxes, including income tax, and can be persistent in collecting unpaid debts.
In this guide, we'll look at the best ways of dealing with income tax arrears, the enforcement procedures HMRC usually follow, and the consequences that can result from a continued failure to address HMRC debt.
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What is HMRC?
Her Majesty's Revenue and Customs (HMRC) is the government department responsible for collecting various taxes, including income tax, national insurance contributions, and value-added tax (VAT). Put simply, it collects the money that pays for the UK's public services and provides targeted services to individuals who require financial support.
HMRC also administers various social and economic benefit programmes and plays a critical role in ensuring individuals and businesses comply with tax regulations. If you're a taxpayer in the UK, you'll have dealt with HMRC at some point - whether you know it or not.
It collects hundreds of billions in revenue every year, which it collects funding public services, such as healthcare, prisons, the police, education, and military defence.
How is my income tax bill calculated?
The process of calculating your income tax bill in the UK involves multiple factors, such as your tax code, monthly disposable income, and pension contributions.
Firstly, HMRC will assign you a tax code, which is a personalised identifier that reflects your financial circumstances. It will help your employer or pension provider determine how much tax to deduct from your income.
Next, your total income for the year (e.g. salary, wages, and rental income) will be taken into account. The tax code you were assigned will then be applied alongside the applicable tax bands (e.g. basic rate or higher rate) to determine the tax owed on your overall income.
Finally, contributions to pension funds will be considered. Some pension scheme contributions can reduce your taxable income, effectively lowering the portion of your income subject to taxation and decreasing your overall tax bill.
What are income tax arrears?
Income tax arrears refer to unpaid or overdue income tax payments that an individual or business owes to the tax authorities, typically HMRC. This can happen for various reasons, such as failing to file tax returns, underreporting income, missing the self-assessment payment deadline, or not making the required tax payments by the specified due date.
In the UK, taxpayers are responsible for reporting their income and tax liabilities through self-assessment, which involves filing tax returns annually. Failure to meet the self-assessment deadline or inaccuracies in reporting can result in income tax arrears.
If you have income tax arrears, it's important to address and manage the problem as soon as possible to avoid penalties, interest charges, and potential legal action by HMRC. Even if you can't afford to repay the debt, you should never ignore HMRC.
HMRC debt is considered a priority debt, which means it must be paid before any other debts. There can be serious consequences for not paying priority debts, including court action (e.g. a County Court Judgment), bailiffs, and, in extreme cases, imprisonment.
What should I do if I fall behind on my tax bill?
If you fall behind on your tax bill, it's essential to address the situation as soon as possible to prevent further financial complications.
Here are the steps you should consider if you're behind on your tax bill:
Contact HMRC
The first step is to get in touch with HMRC by phone or online as soon as you realise you've fallen behind on your tax bill. By explaining your circumstances and the reason behind the arrears, HMRC may provide guidance on what to do next.
Ask for a 'time to pay' arrangement
HMRC may agree to a 'time to pay' agreement, which allows you to spread your payment plan over an extended period to make it more manageable. This can be particularly helpful if you're facing temporary financial difficulties, like an emergency expense or unexpected household bill.
Submit any outstanding tax returns
If your arrears are due to unfiled tax returns, you must complete and submit any outstanding tax returns promptly. Ensuring your tax returns are accurate and up to date is essential for determining your actual tax liability.
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How should I deal with debt owed to HMRC?
HMRC debt can be stressful, but there are steps you can take to deal with it more effectively. Here are some tips on how to deal with tax debt:
Check your tax bill is correct
The first thing you should do is check that HMRC is asking you to pay the right amount of tax and that you have supplied the correct information. Some of the key things you should check are your business finances and expenses.
Stick to a budget
Having a plan to deal with your debt can make it feel more manageable and help you see what you can afford to pay towards your HMRC tax debt. Make sure to budget for housing, utilities, food, and other basic spending needs.
Contact HMRC
HMRC would rather your debt be paid before your next tax bill is due. You may be able to repay your debt to HMRC over a longer period if you can't afford to pay it upfront by showing them your budget and explaining that the amount you are offering is the maximum you can afford once your other living expenses have been taken into account.
How does HMRC recover tax debts?
HMRC enforces a certain set of steps to recover tax debts from individuals or businesses who owe outstanding debts. Here is an overview of the debt recovery process it typically follows:
Reminder of the debt
The first thing HMRC will do is send you reminders and notifications informing you of your outstanding tax debts. These notices are designed to act as a warning to urge you to settle your debt as quickly as possible.
Penalty for failure to pay
If you continue to ignore the debt, HMRC will impose penalties. This usually happens in regular increments (e.g. once the debt is 30 days, six months, and 12 months late) and increases the longer the debt goes unpaid.
Notice of Enforcement
If the debt remains unpaid despite several reminders and penalties, HMRC will issue a Notice of Enforcement. This is a formal notice that outlines their intent to take further enforcement action if the debt is not settled.
Enforcement action
HMRC can employ various enforcement actions to recover the debt, such as passing the debt to a collection agency or instructing bailiffs to collect the money or seize your assets.
Escalation and possible court action
If all previous attempts to recover the debt fail, HMRC will escalate the matter and potentially take legal action. This could involve obtaining a court judgment against you, which may lead to further enforcement action.
What happens if I continually fail to pay HMRC debt?
Continually failing to repay HMRC debts can lead to more severe consequences and enforcement action being brought against you. Here are some potential outcomes if you consistently struggle to repay tax debts:
Dealing with debt collection agencies
HMRC may engage with debt collection agencies to recover the debt on their behalf. These agencies will likely contact you and attempt to collect the outstanding amount.
Attachment of Earnings
If you owe money to HMRC and have a job, a court order may be applied to deduct a portion of your earnings directly from your salary. This is called an attachment of earnings and ensures that a portion of your income goes towards repaying the tax debt.
Seizure of savings or bank account
HMRC has the authority to seize funds directly from your savings account or bank account to satisfy the debt. This action usually occurs as a last resort if other methods of debt collection have been unsuccessful.
Enforced bankruptcy
For substantial tax debts that cannot be repaid, HMRC may initiate bankruptcy proceedings against you. This is a legal process that can lead to the sale of your assets to settle the debt. Bankruptcy has significant financial and personal implications, including restrictions on obtaining credit and potential harm to your credit rating.
Find out if your debts qualify
Check my eligibilityWhere can I get further help with HMRC debt?
If you're dealing with HMRC debt and are worried about what may happen next, it's important not to bury your head in the sand or suffer in silence.
Whether you've forgotten to file your tax bill or are being visited by bailiffs, there is help available every step of the way.
Owing money to HMRC can be intimidating, but it doesn't need to be. As long as you comply and are honest about what you can afford to repay, you should be able to set up a payment plan that both parties can agree on.
