Tax debt – Is an IVA or Bankruptcy best

Tax debt – Is an IVA or Bankruptcy best

If you have tax debt and can’t agree a sensible time to pay arrangement with HMRC, you can consider the debt management options of either an IVA or going bankrupt.

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Can tax debt be included in an IVA?

Tax debt (including personal tax arrears, VAT and PAYE) can all be dealt with using an IVA. That said, HMRC will only accept the proposal if it reflects the demands they are likely to make.

Firstly your tax returns must up to date. There is no point in proposing an IVA if this is not done. If you are behind, you may need to pay an accountant to assist you with this.

There are also significant implications if you are a home owner. HMRC will normally require that your share of any equity is released in full within 2 years of starting the IVA. This must be anticipated and planned for.

Your IVA is likely to be rejected by HMRC unless it is put forward by a specialist Insolvency Practitioner. Talk to us for assistance with this.

Is Tax debt written off if you go bankrupt?

Going bankrupt can be a good way of dealing with tax debt. Any such debt you owe up to the date of your bankruptcy will be written off. HMRC can’t stop you from using this solution.

Once you are bankrupt you can continue to work on a self employed basis as long as you trade under your own name. However you can’t act as a company director until you are discharged (this will normally be after 12 months).

However if you are a home owner you need to understand the implications. Your share of any equity in your property will normally have to be paid to the Official Receiver. As such, bankruptcy may only be a sensible solution if the equity in your property is minimal or you have already decided to sell.

Tax credit overpayments can also be included in bankruptcy. However these debts may still be recovered from any future claim you make for Universal Credit.

What about using a Debt Management Plan?

It is difficult to include tax debt in a debt management plan (DMP) because the Plan is likely to last many years. HMRC will not accept this. They are only likely to agree to this type of scheme if their debt can be repaid within a maximum of 18 months.

One way round the problem is to create a separate agreement to repay your tax within the 18 month period. You can then use a DMP to manage the other debt you have.

Of course this will only work if you can afford to repay HMRC within 18 months. If not or doing so will leave you short in other areas you will not be able to use this solution.

Want more advice on how to deal with your tax debt? Call us on 0800 077 6180 or complete the form below for a ring back.

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    2 thoughts on “Tax debt – Is an IVA or Bankruptcy best

    1. Dave says:

      Hi, We owe HMRC approx 94k but have no way of paying this. We have approx 200k equity in our home and HMRC will accept a voluntary legal charge on our home. They have stated that no additional interest will be applied. We need some guidance on this to answer questions such as once the charge is applied can HMRC force us to sell? Where can we turn for advice?

      1. Hi Dave

        The fact that the court grants a creditor a charge over a property does not automatically give the creditor the right to for the sale. This is the same for HMRC or any other creditor. If HMRC want to try and force the sale they would have to go back to court and argue for a forced sale order. This would be much much harder to get.

        If HMRC wanted to force you to sell your property they would likely have petitioned for your bankruptcy rather than accepting a voluntary charge. Given they have not done this and are willing to agree to no interest being added to the debt, it seems they will are happy to simply wait for the repayment of their debt until such time as you decide to sell.

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