If you owe unpaid taxes like VAT, National Insurance, and income tax, it is important to deal with them promptly. These debts are handled by Her Majesty’s Revenue and Customs (HMRC).

These debts are labelled as ‘priority debts’, which means that failing to pay them could result in severe consequences such as court proceedings, involvement of bailiffs, and in rare cases, imprisonment. The urgency in addressing them stems from the seriousness of the situation.

This guide will explain how to manage arrears and highlight the consequences that can result from not doing so.

Getting in control of tax arrears

Managing your HMRC debts may not be as daunting as you think. It is possible to regain control over your debts with the right approach.

Although the HMRC is a large government organisation, its calculations are not always accurate. To ensure that you’re paying the correct amount, it’s essential to double-check.

Ask yourself:

  • Have you given them the accurate earning figures of your business?
  • Did you organise all your business expenses appropriately?
  • Have you verified if your details are accurate on the correspondences they sent?

Incorrect information may cause miscalculations and result in overpayment. Consulting with your accountant can provide valuable assistance if you’re unsure about your tax situation as a self-employed individual or a business owner.

Once you know the exact amount of tax debt you owe, the next step is to create a budget to determine how you will pay off the debt.

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Calculating income

To begin, determine the amount you receive monthly from the business as your income. If you have a fixed amount each month, this step is easy. However, if the amount varies, calculate an average based on the previous 3 to 6 months. This average amount represents your income.

Calculating essential outgoings

To clarify, your essential outgoings are the monthly payments you make to cover your basic needs such as mortgage or rent, transportation, utility bills, essential food, and clothing. Adding up these costs will help you determine your essential expenses.

In addition to the mentioned costs, there may be other expenses that you are obligated to pay under a contract, such as charges for a mobile phone plan, credit card payments, or financing expenses. Although they may not be essential, you must budget for these expenses.

Calculating disposable income

Subtract your essential outgoings from your income figure to calculate your disposable income. This amount must be accurate as it will determine what you can pay the HMRC to resolve your debt. Note that the amount may appear either high or low.

You don’t have to be too concerned. Even though having savings and living a normal life is essential, it’s improbable that they’ll ask you to pay the entire amount. However, since this is a priority debt, it must be paid off immediately.

Talking to HMRC

If you have a specific amount of money that you can pay every month, it would be beneficial to contact HMRC and arrange a recurring payment plan.

You can contact HMRC by calling 0300 200 3300. Their phone lines are open from 8am to 8pm on weekdays and from 8am to 4pm on Saturdays, so you don’t have to worry if you work long hours. Keep in mind that HMRC works on an annual basis. Therefore, they will attempt to establish a repayment plan that enables you to clear your debt by the end of the current financial year to avoid rolling it over into the next year.

The lender can ask for a payment that is beyond your means. While it is crucial to repay them, it is also important that you do not face financial difficulties in other areas. Therefore, try to pay what you can afford and offer to display your budget to them if they ask for evidence.

If HMRC asks for more money than you can afford to pay now, try to make a payment if possible. It’s important to pay something rather than risk any confusion that may give an impression that you have no intention of paying the tax you owe.

Stay in touch

It’s important to communicate with your creditors, including HMRC, especially if you’re having trouble paying your taxes. Don’t wait until you miss a payment; reach out to them as soon as possible to make arrangements.

It is important to provide them with your current contact details, such as phone number or email address. If possible, consider making an overpayment, as this may provide some temporary financial relief in case you face a difficult month in the future.

Even if you don’t stay in touch, the recovery process and any associated punishment will still proceed, so staying informed is important.

What happens if you don’t pay HMRC debt?

If you owe money to HMRC, they may not follow the same process as other companies. Unlike a credit card, loan or utility companies, they won’t repeatedly call or send reminders before passing your debt on to a collection agency. In some cases, collection agencies may come to your home.

If you are facing a tax payment issue with HMRC, it is advisable to avoid escalation by setting up a Time to Pay Arrangement with them before the formal process starts.

Time to Pay Arrangement

HMRC offers Time to Pay for repaying taxes or other debts. This process lets you divide the amount you owe into instalments, making it easier to pay.

The specifics of your payment plan, such as the number of instalments and the amount to be paid in each instalment, will vary based on your circumstances. For further information on establishing a Time to Pay agreement, visit the gov.uk website here.

Action HMRC can take includes:

HMRC has a range of actions if you fail to repay money owed or default on your time-to-pay agreement. These actions can include court action. See below for some of the actions that HMRC can take.

Applying to the courts for a County Court Judgement (CCJ)

It may affect your future credit if you are legally required to create a repayment plan. Not paying a CCJ can result in more severe consequences. Additionally, if a ‘charging order’ is issued, your home and business properties may be at risk.

Issuing a magistrates’ court summons

You must bring information about your business and personal finances to the hearing. A payment plan will be determined, and you must stick to it. Failure to comply with the payment plan decided by the court may result in additional court appearances and in some cases, incarceration if it is determined that you have the means to make payments but have not done so.

Starting bankruptcy proceedings

If your debts exceed £5,000, HMRC may declare bankruptcy, resulting in the sale of your assets, including your home, to repay your debts. During your bankruptcy, you will not be allowed to hold a directorship, and your credit rating will be significantly affected, most likely resulting in consequences for your business.

Applying for an attachment of earnings

Whereas you are employed, a considerable portion of your income can be deducted before it is disbursed to you.

Seizing money you have saved

If your debt is settled and you have over £5,000 left in your savings account, HMRC may withdraw money directly from it.

Who can support you with HMRC debt?

In case you require assistance with managing your HMRC debt problems, several charitable organisations in the UK can provide support.

  • Business Debtline – If you’re a self-employed individual in the UK struggling with money management or debt, you can receive support by calling 0800 197 6026.
  • Citizens Advice – Call 03444 111 444 for assistance with personal and business issues, and speak with specialist debt advisors who can guide business finances.
  • TaxAid – If you’re on a low income and HMRC can’t help you with your issues, you can try giving 0345 120 3779 a call.

Act now on priority HMRC debt

Don’t wait until tomorrow to deal with any money you owe to HMRC. They can take action against you without delay. It’s best to contact them today to arrange payment based on what you can afford and keep in touch with them throughout the process.

Although it is possible to catch up with many personal debts and avoid legal action, HMRC is stricter and less forgiving than other creditors. Therefore, it is important not to jeopardise your financial and business future by taking risks.

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Frequently Asked Questions

You can follow these 5 steps to deal with HMRC debt:

  • Check your tax bill is right.
  • Put together a budget to determine how much you can afford to pay towards your income tax arrears.
  • Contact HMRC to agree on a regular payment to clear the debt.
  • Make your payment.
  • Keep them updated. If you don’t pay your tax bill, HMRC can recover the money you owe through direct recovery of debts, distraint, or court action ¹.

Getting HMRC debts written off through a debt solution such as an IVA is possible. However, the firm has to agree to this. As a result, you should be in a position where the solution ultimately grants HMRC more money than it would otherwise have gained through bankruptcy 2.

HMRC can chase a debt for up to 20 years after the end of the tax year in which the debt arose ¹.

You can call HMRC Debt Management support service on 0300 200 3887 if you need their help with debt management. They will be able to help you set up a tax payment plan if you owe tax and are unable to pay HMRC.

HMRC uses several debt collection agencies, including Advantis Credit Limited, Bluestone Credit Management Limited, BPO Collections Ltd., CCS Collect Limited, Commercial Collection Services Limited and Direct Collection Bailiffs Limited 3.

You can find out all your debts by logging into Credibble Debt. We analyse your Equifax credit report for free to extract all your debts 3.

There are several reasons why you may owe money to HMRC, such as:

  • You have not paid enough tax during the year.
  • You have received income from multiple sources.
  • You have not declared all of your income.
  • You have claimed too many allowances or expenses ¹.

If you cannot pay HMRC:

  • You should contact them as soon as possible.
  • They may agree to let you pay what you owe in instalments.
  • They may also decide to give you more time to pay if they think you cannot afford it.
  • If you still cannot pay after this time, they may take legal action against you ¹.

No, it is not advisable to ignore HMRC as they can take legal action against you if you do not pay what you owe ¹.

If you don’t pay what you owe to HMRC:

  • They may take legal action against you.
  • They may also charge interest and penalties on what you owe.
  • They may recover the money through direct recovery of debts, distraint or court action ¹.

References:

  1. Business & HMRC Tax Debt. Free Advice From StepChange.
  2. How To Write Off HMRC Debts | Advice | Debt Support Centre.
  3. How to pay a debt to HMRC with a Time to Pay arrangement – GOV.UK.
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