Nil tax (NT) coding/IPAs

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Nil tax (NT) coding/IPAs (for reference)

Where bankruptcy occurs, HM Revenue and Customs (HMRC - formerly Inland Revenue) submits a claim in the bankruptcy proceedings for the whole of the outstanding tax due in that tax year, for both employed and self-employed individuals. The claim submitted in the proceedings by HMRC is dealt with in the same way as any other unsecured creditor. As a consequence of HMRC submitting this claim for outstanding tax in the year of bankruptcy, where the bankrupt is employed on a PAYE basis, HMRC applies a nil or no tax (NT) code to the bankrupt's salary for the remainder of the tax year in which the bankruptcy order was made. The NT code is applied to all income earned by the bankrupt after the bankruptcy order date, either until such time as there is a change in the bankrupt's source of income, or the tax year in which bankruptcy occurs comes to an end, whichever event is the earliest. This means the bankrupt does not pay any tax on his/her income whilst the NT code is in force and is thus in receipt of additional income to that received prior to the application of the NT coding.

If the bankrupt changes income source/employer during the course of the tax year in which he/she is made bankrupt (which could include becoming self - employed having previously been PAYE employed), HMRC deems this to be a change in source of income, and a new tax code will be issued. The bankrupt will be required to pay tax on his/her earnings from the date of the change. For further information regarding what is meant by a change of income source refer to Chapter 77, Direct Taxation, paragraph 77.23, Nil tax codes and Chapter 77, Direct Taxation, paragraph 77.35,Taxation in the year a bankruptcy order is made. The bankrupt also becomes liable for tax again on any income received from the start of the tax year following the year in which bankruptcy occurs.

The NT coding provision is not applied specifically to benefit the bankrupt by increasing his/her income. Instead, where a bankrupt is in PAYE employment, HMRC has to put itself in to the same position as would have been the case if the bankrupt had been self-employed (and not subject to PAYE), where tax would have been due at the date of the bankruptcy order. The NT code is therefore applied by HMRC where bankrupts are in employment, to ensure that the taxation of all individuals is dealt with on an equal basis.

It has been agreed that electronic notification of the bankruptcy order will cause the local tax office dealing with the bankrupt taxpayer’s affairs to identify where appropriate cases where the nil tax (NT) code will be applied, the application of the NT coding is not dependant on any manual notification from the official receiver to the tax office.

The monies refunded as a result of the application of the NT code are a direct consequence of the making of the bankruptcy order and should therefore be available for the benefit of the bankruptcy estate. Where the NT code is expected to be applied before the end of the tax year, the additional income arising as a result of the application of the NT coding can be included when calculating thebankrupt's surplus income from which contributions can be collected under an IPA.

It also possible that the increased income available to the bankrupt as a result of the application of the NT coding can in itself provide the basis for an IPA/IPO, even where the bankrupt does not have sufficient surplus for an IPA/IPO from his/her usual net income. Where the bankrupt has signed the TNIDIS form an IPA should be sought in preference to an IPO to claim the surplus income. In this instance an IPA would be agreed based solely on the additional income created by the NT coding, where the bankrupt agrees to IPA contributions equivalent to the amount of tax that he/she would otherwise have paid.

In all cases, Section 310(2) must still be taken into account when considering whether an IPA is viable to cover the period of the NT tax coding, to ensure that the bankrupt and his/her family are left with sufficient funds for their reasonable domestic needs. It may be that in very rare circumstances it will not be appropriate to require the bankrupt to consent to an IPA to collect the additional income resulting from the NT coding, if the bankrupt can demonstrate that this would cause him/her to experience financial hardship.

The IPA which includes the income arising as a result of HMRC applying the NT coding should be drafted so that when HMRC recommences tax deductions from the bankrupt's income, the amount payable can be reduced accordingly or the agreement can be made such that the NT element of the IPA will only be collected during the period during which the NT coding takes effect.

Where an NT IPA has been agreed and the bankrupt has signed the Tax and National Insurance Disclosure Authority (form TNIDIS) this can be forwarded to the local tax office with form IRNTC to request that HMRC forward notice of the NT coding to the official receiver's agents to enable them to commence collection of the NT IPA. (See also Case Help Manual part Income Payments Agreements vi "NT" tax code income payments agreements and income payments orders).

With NT IPOs, there was a time problem in that where the bankruptcy order was made after the end of November of the tax year in question, it could be difficult to obtain the court order for the IPO quickly enough to merit such a course of action but this need not be the case with an IPA. When deciding whether an IPA is appropriate in order to collect surplus income arising as a result of the application of the NT coding, consideration should be given to the amount of tax the bankrupt pays each month and the time the local tax office is likely to take to implement the NT coding.

In practice, it can take some time to implement the NT code and the bankrupt will then receive the overpayment of tax as a refund at the end of the tax year. Where such a tax refund arises due to delays in adjusting the bankrupt's tax code, it should be claimed by using the bankrupt’s duly completed authority TNIDIS which authorises the payment to the official receiver/trustee of income tax refunds payable for any year up to and including the tax year in which the bankruptcy order was made. The tax refund must not be claimed as after-acquired property.

HMRC have confirmed that the application of the NT code to a bankrupt's income will not have any impact on a bankrupt's claim for working tax credits. Tax credits will continue to be paid at their existing rate regardless of the application of the NT coding unless the circumstances of the claimant (bankrupt) change (other than the application of the nil tax code).