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The Impact that Non-Submission of Tax Returns can have on the Debtor

Spiralling debt problems are part of the world that we are currently living in and HM Revenue & Customs (“HMRC”) are often one of the largest creditors in insolvency procedures.

This can be for a number of reasons and in my experience, sole traders and Directors of small businesses facing financial difficulties tend to avoid paying HMRC in order to pay suppliers and continue trading, which can have implications for them in the future.

Another factor includes non-submission of tax returns. In this situation, HMRC may issue determinations often resulting in a large liability which may be incorrect.  HMRC expects all customers to make payments when they are due, but in reality we know that this is sometimes not possible.

The determinations issued by HMRC are based on information available to them such as previous returns. It is common knowledge that if returns are not submitted within the deadlines then penalties are applied, increasing the overall liability. It is important to note that even if you believe that no tax is due, you should still complete a nil return, otherwise penalties could still be applied.

The thought of completing outstanding tax returns can sometimes be daunting, especially as there are restrictions relating to the number of years HMRC will allow you to submit. If matters are ignored, it is likely this will have a detrimental effect which you may not be able to reverse. Tax returns are a legal obligation and if determinations are made through failure of submission, HMRC are entitled to the tax due set out on that determination and means that HMRC can pursue you through the courts, sometimes resulting in Bankruptcy.

This is obviously a last resort and prior to reaching this stage, I would encourage you to work with HMRC to establish the correct amount of tax due, as you may be able to discharge the revised amount.

For some individuals, Bankruptcy is the only option for dealing with the debts that they cannot pay. Bankruptcy can free you from unmanageable debts so you can make a fresh start.  However Bankruptcy is a serious matter and is subject to restrictions so it should not be seen as a light hearted way out of debt. The alternative to Bankruptcy is an Individual Voluntary Arrangement which I will expand on in this article.

In this case study, I am going to focus on the implications that non submission of tax returns can have on the Debtor and how my firm assisted in turning the Debtors personal situation around, in a positive way.

Between the years of 2003 to 2012 the Debtor was self-employed trading in a profession he had worked for many years. Due to increasing work load and the need to expand, the Debtor set up a Limited Company with his wife in the later part of 2012.

In August 2014, HMRC commenced proceedings action against the Debtor and petitioned for his Bankruptcy for the sum of £150,057. This figure was largely based on estimated VAT and self-assessment tax liabilities for his sole trading years.

The Debtor had a very hectic and busy lifestyle which resulted in the Debtor neglecting his financial affairs resulting in failure to submit tax returns to HMRC for the period of self-employment. Efforts were made to rectify the situation but the exercise was not completed and in the later part of 2014 a Bankruptcy Order was made against the Debtor. This had a detrimental effect on his Company as the Bankruptcy meant he could no longer act as a Director, the Company’s bank account was frozen and the effectively had to cease trading.

The Debtor realised the severity of the Bankruptcy and attended a meeting with the Official Receiver to discuss matters. In a majority of cases, the most valuable asset that belongs to a Debtor is their matrimonial home and this was true in this case. Aside from HMRC, the Debtor had 4 other unsecured Creditors with liabilities of approximately £30,000. Upon review, it was clear that Creditors (including HMRC) could be paid from the Debtors income and equity in the matrimonial home. However due to the substantial fees involved in Bankruptcy proceedings, Creditors would not be paid in full.

It was at this point that the Debtor sought advice from IRL. An Individual Voluntary Arrangement known as an “IVA” was proposed. Generally speaking, fees are substantially lower in this Insolvency process resulting in a higher return to Creditors. In the event that the IVA was approved, it would allow the Debtor to apply to have the Bankruptcy annulled and any unrealised assets would revert back to the Debtors control.

Following our advice, IRL assisted with drafting the proposal for the IVA. An estimated Statement of Affairs was produced detailing all of the Debtors assets and liabilities. This was drafted on the basis that HMRC’s claim remained at £150,000 and the Debtor would contribute the equity available in his property and make voluntary Contributions from surplus income over a 5 year period.

It was detailed in the proposal that the Debtor would complete all outstanding tax returns reducing HMRC’s claim considerably. From the outset, it was clear that the main objective in this case was to organise the Debtor’s tax affairs as soon as possible to determine the correct amount due to HMRC.

The difficulty when proposing an IVA is that it must be approved by over 75% of Creditors’ claims and in this case HMRC was the major creditor and if they rejected the IVA, the decision could not be overturned. Although the outcome in the IVA resulted in payment in full, it was uncertain whether HMRC would accept the proposal. The estimated outcome detailed in the proposal was as follows:

Bankruptcy Voluntary Arrangement
£ £ £ £
Realisable Amount
Proceeds from sale of property 107,951 107,951
Voluntary Contributions needed to pay creditors in full 147,810 85,918
Available for dividend 161,951 193,869
Less Fees
Official Receiver 1,715 1,715
Secretary of State Fees 34,895 0
Cheque fees 1.15p x 10 & banking fees 12 0
Estimated Trustee’s Fee 30,000 0
Petitioners costs 2,500 2,500
Application to annul bankruptcy 0 500
Nominees fees 0 3,000
Estimated Supervisors fees 0 4,000
Disbursements 793 793
Unrecoverable VAT 6,520 74,720 520 13,028
Amount available to Unsecured Creditors 180,841 180,841
Less Unsecured Creditors (180,841) (180,841)
Estimated (deficiency)/Surplus 0 0

At the first creditors meeting, HMRC voted against the proposal due to the non-submission of returns. Although the proposal advised that returns would be completed, they remained unconvinced and advised that unless the returns were completed, they would not accept the IVA. Accordingly, the creditors meeting was adjourned and the Debtor worked closely with his accountants to ensure that all returns were completed before the next creditors meeting which was to be held a week later.

All returns were subsequently completed and HMRC voted in favour of the IVA subject to the Debtor agreeing their modifications. One modification was that HMRC would not submit their final claim until the self-assessment return for 2014/2015 was completed by the Debtor.

Following approval of the IVA, the Debtor immediately placed his property on the open market and actively worked with his accountants and my firm to ensure that all matters were dealt with.

As agreed, the Debtor completed the tax return immediately after 5 April 2015 and instructed a solicitor to assist with the annulment of his Bankruptcy which was successful. The Debtor’s property was sold within six months and the equity was transferred to the IVA.

A final claim of £55,000 was submitted by HMRC, nearly £100,000 less than originally calculated! The IVA was successfully concluded and all Creditors were paid in full with statutory interest, the surplus funds reverted to the Debtor.

In this case, the Debtor realised that matters could not continue unresolved and took professional advice before it really was too late. Bankruptcy can be extremely expensive and it is therefore crucial that financial problems are not ignored. The Debtor has been able to move on and “wipe the slate clean” but this will not change the emotional stress the last 12 months has had on the Debtor. If the Debtor had completed the tax returns as and when required, it is very likely that HMRC would not have petitioned for his Bankruptcy and in the event that he was unable to pay the debt due, an alternative solution could have been reached, avoiding expenses associated with Insolvency proceedings.

Most debt problems can be solved.  If you are struggling with debt, try not to worry but do not ignore your problem.  It is vital to take action now and gain control of your finances.

A quick, informal chat with IRL will enable you to find the right help and advice to help you to become debt free.


Vanessa Blackwell




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