With the deadline for self assessment tax returns looming at the end of January we consider whether you can include an unexpected tax bill if you are already in a Debt Management Plan (DMP).

If you are using a DMP adding any new debt to the plan can cause a problem. Once the new debt is added the amount which you are able to repay has to be shared between more debts. As such the amount that each creditor receives will reduce and it is likely that the payments will have to be renegotiated.

If the additional debt that you want to add is owed to HMRC this may cause even more issues because HMRC are unlikely to agree to simply being included in the agreement.

Can HMRC tax debt be included in a DMP?

The problem with including tax debt in a DMP is that the amount that HMRC will receive each month from the plan is normally very small. HMRC will often require larger payments so that outstanding debts are paid within 12 months.

HMRC can also often be nervous that if you are already in arrears with your tax payments and you are left to manage your own affairs, you will also not be able to pay tax bills which become due in the future.

If you are already in a Plan and receive an additional or unexpected tax debt it may therefore be a better option to negotiate a repayments with HMRC outside of your main agreement.

Of course the problem with this is that you will need to be able to make a payment which the revenue finds acceptable but also leaves enough money available each month to maintain your ongoing Plan. This may not be easy or even possible at all.

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Should you consider starting a different debt management solution?

Instead of trying to add HMRC debt to an existing DMP or finding a way to pay it separately it might be better to consider an alternative solution altogether such as an Individual Voluntary Arrangement (IVA).

This type of debt solution gives a significant advantage because HMRC are generally supportive of these Arrangements. One in the Arrangement your finances are formally supervised by an insolvency practitioner and so HMRC have a degree of confidence that not only are your tax arrears being settled but also future tax bills will be budgeted for and paid on time.

In addition that not all of the debt you owe has to be paid back. The Arrangement allows you to pay as much as you can afford to your creditors over five years. At the end of this period, any outstanding debt is written off.

BMD Tip: If you are not a home owner or your property is in negative equity you should also consider the option of Bankruptcy which will normally see you free of all your debt far more quickly than either of the other two debt solution options.

Review your options

If you owe tax which you are struggling to pay, there is no reason why you should not speak to HMRC and request that they allow you pay what you owe in instalments. However, if you are already in a DMP including a new tax debt to the existing plan could cause issues.

It will mean that a renegotiation will have to take place with each creditor as they will all now receive a smaller payment. This may trigger some or all of these creditors to restart their interest charges. In addition, there is no guarantee that HMRC will agree to the proposed payment available through the plan.

As such, where possible it is generally sensible to consider moving to a more formal solution.