If you owe tax debt to HMRC an IVA could help. However whether it is an option will depend on a number of circumstances.
Jump to article contents:
- Can HMRC debt be included in an IVA
- Does the reason for the debt affect the decision?
- What if you are a home owner?
- Options if HMRC reject your proposal
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Can HMRC Debt be included in an IVA?
Money can be owed to HMRC for various different reasons. A common one is tax arrears. You may also owe VAT or have to pay back a Tax Credit Overpayment.
All these types of debt are unsecured. As such legally speaking they can be included in an IVA. However the Arrangement can only go ahead if it is accepted by your creditors.
HMRC will only accept the proposal in certain circumstances. If the amount you owe them exceeds 25% of the total then they have the power to reject the whole proposal unless you agree to their requirements.
If the amount you owe HMRC is less than 20% of your overall debt an IVA will normally be possible as long as the other creditors accept it.
Does the Reason for the Debt Affect the Decision?
Late Tax Returns
Where you have not submitted tax returns for a number of years (or have not paid the tax due) gaining HMRC agreement to an IVA is not easy. Your proposal might be rejected.
If honest mistakes have been made when calculating your tax HMRC are likely to be more sympathetic. In these circumstances implementing an IVA may well be possible.
Overturned Employee Benefits Trust
You may have used a tax management scheme such as an EBT which has been overturned. In this situation HMRC may agree an IVA if you entered the scheme in good faith thinking it was legitimate.
Overpayment of Tax Credits
Where the overpayment was due to a mistake (and not as a result of fraudulent claims) this debt can be included as long as it is not the only debt owed.
If HMRC make up more than 25% of the debt included in your IVA then whether they accept the agreement will depend on the reason for your debt with them.
What if you are a Home Owner?
Agreeing an IVA with HMRC can be much more difficult where you are a home owner. This is because they will have strict demands regarding equity release.
You will normally be required to release your share of any equity in your property into the IVA within the first 12-18 months. You will not be allowed to wait until the 5th year as in standard agreements.
If you start the Arrangement and but then fail to meet your equity release obligations HMRC will stipulate the Arrangement should be terminated. They would then normally force you to go bankrupt.
It is acceptable for a third party to pay the required amount of cash into your IVA. The money does not have to come specifically from remortgaging your property.
What are your Options if HMRC Reject your IVA?
Where HMRC are a majority creditor they may reject your proposal outright. Alternatively they could make demands around equity release or other things which you cannot accept. If this happens you will not be able to start an IVA.
Instead you will need to find an alternative solution. If you are not a home owner or there is little or no equity in your property bankruptcy could be a sensible next step.
Where there is significant equity in your property the only alternative will be to agree a time to pay arrangement directly with HMRC. You might be able to agree an IVA with your remaining creditors if this is still affordable.
Where HMRC reject your proposal you do not automatically have to go bankrupt. However it might be a sensible option.
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