Bankruptcy, tax and self-employment.

77.35 Taxation in the year a bankruptcy order is made
HMRC bases its claim on the tax due for the whole year in which a bankruptcy order is made, in addition to any arrears, but only in cases where there has not been a change of source of income to the taxpayer. The bankrupt is liable to tax on his/her assessable income and profits from the end of the tax year in which the bankruptcy order was made unless there has been a change in the bankrupt’s source of income.
‘Source’ is an expression used by HMRC to indicate from where a taxpayer has obtained or is obtaining taxable income. For example, if a taxpayer was engaged as a window cleaner for the whole of the tax year in which the bankruptcy order was made against him, there would not be a change of source which would affect the basis of the bankrupt’s liability to tax. But if, after the bankruptcy order and in the same tax year, the bankrupt were to obtain (alternative) work as a carpet cleaner or were to take direct employment (and thus become subject to the collection of income tax under the PAYE scheme), either of these events would be a change of source which would cause HMRC to hold the taxpayer (personally) liable for the tax arising from this income in the period from the date of the bankruptcy order or the date of the change, whichever is the later, until the end of the tax year. The tax arising for this period would not be a provable debt in the bankruptcy but would constitute a post bankruptcy debt for collection by HMRC in the usual way.
In assessing the amount due for the post change of source period of the tax year, HMRC will apportion the taxpayer’s allowances based on the date the change of source occurred. A change of source may reduce the level of HMRC's claim in the bankruptcy as it will only cover part of the tax year as opposed to the full tax year. A change of source might also lead to the taxpayer being given a new record on HMRC's computer system at an earlier time which will reduce the possibility that documents will be sent to the official receiver in error.
As a change of source will lead to the collection of tax, the bankrupt’s NT code (see paragraph 77.23) will come to an end at an earlier time which will, in turn, affect the level at which an income payments agreement or income payments order might be obtained.
77.36 Completion of returns after bankruptcy order
Self assessment returns will be issued to the bankrupt post bankruptcy and the bankrupt must continue to complete his own returns. It is not the responsibility of the official receiver to do this.
At the date of the order, self assessment returns which relate to the period before the bankruptcy may be due/ outstanding. Similarly, a return may become outstanding which relates to periods both before and after the bankruptcy order. The bankrupt may be unwilling to submit a return which relates to either of these periods because the information will only be used to formulate a claim in the bankruptcy but it may be beneficial for both the official receiver and HMRC for the bankrupt to complete and submit any such outstanding returns as this will enable HMRC’s claim to be submitted more quickly. Other than by the giving of access to accounting information, official receivers should not become involved in this process.
The statements of account (see paragraph 77.32) issued by HMRC will be sent to the taxpayer in respect of post bankruptcy taxation and one statement of account will be sent to the official receiver to inform of the up to date position as at the date of the bankruptcy order (the pay slip which will automatically accompany the statement should be ignored). Thereafter, statements of account will only be sent to the official receiver on request.
If official receivers receive self assessment returns for completion in respect of the affairs of a bankrupt (in respect of tax years before or after the date of the bankruptcy order) or statements of account other than in the circumstances described above, the documents should be returned to the issuing tax office with a short note stating that they have been sent to the official receiver in error and a request should be made that the tax office consults its internal guidance on the correct procedure.
For the purposes of HMRC’s claim and for Self Assessment, employed bankrupt taxpayers are treated in the same way as self employed bankrupt taxpayers, including as regards changes of source (see paragraph 77.35), but prior to the time of the bankruptcy such individuals might have been outside the Self Assessment regime (as their tax affairs were contained within the PAYE system.) If the employees have not been part of the Self Assessment regime they will be added to the regime from 6 April before the date of the bankruptcy order so that a Self Assessment return can be obtained for the whole of that tax year. In such circumstances, the taxpayer’s allowances might or might not be apportioned and the taxpayer might or might not also receive a new record on the Inland Revenue’s computer system.
Where an individual raises a query with the official receiver about his/her tax status, he/she should be referred to HMRC for an explanation of how his/her tax affairs have been calculated.