Bankruptcy and NT (Nil) Tax Code

DarkConvict

This is not a request of advice but a discussion.

A friend has recently gone through bankruptcy and was aware that he would be on a NT tax code if sucessful, where he employer does not take away any tax from his wages. Several of us helping him through this, saw it as he does not pay any tax until April the following year.

But in actual fact, this is not the case. Whilst you do not pay any tax, you still owe it and have to pay it in April, which i do not disagree with otherwise it would be best to go bankrupt just after the new tax year to get 12 months tax free income.

I was wondering if anyone else had been under this illusion and was unaware of it. Had a letter today stating that the official receiver would be applying a NT tax code but then taking the tax themselves, which until i did research into the matter didn't make any sense.

A majority of the bankruptcy debt is actually a tax debt, which we now know (only today) is actually from a previous bankruptcy (5 years ago) where he did not pay tax for a year, because the official receiver did not keep the tax themselves, applied the NT code and did not tell him he needed to pay the years tax to the HMRC in April. This tax deficit was only chased up 3 months ago when it turned out he was paying to much tax per year and they looked at the last 6 years as well.

So the question to discuss is,

Does anyone else feel that it needs to be made clearer what the NT (Nil) tax code actually means and that tax is still due?

alastairq

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).

http://forums.moneysavingexpert.com/showthread.html?t=1064237

is the reference.

TO me, that means. the tax man becomes a creditor upon BR, therefore cannot continue with PAYE [equality with self-employed plays a part here].

The OR then places an IPA on the BR, to the tune of the amount normally paid in tax...which is distributed via the estate.

Unless there is surplus income as well, this IPA usually ends with the tax year.

For the next tax year, if still BR, the BR gets a new code, and if PAYE, then pays as normal......

Tax cannot be claimed twice for the same income....effectively.

If the IPA terminates prior to the tax year, as can happen, then I understand that the excess income from the NT will need to be paid. ie if an IPA terminates in, for example, February....the NT code will still be in situ, but the Discharged BR will need to pay the amount of tax normally due, at the end of the tax year. ...equally, if the NT occurs sometime after the tax year starts,the tax already collected via PAYE gets returned as a rebate.....but is sent to the OR.


The notion that a BR gets billed for a whole year's tax doesn't happen.

DarkConvict

That is what i also used as reference. Seems to be the best way to explain it.

As I see it. All unpaid tax before the bankruptcy is covered by the bankruptcy (as you mention above).
However any tax to be paid after it, i.e. all wages from the date of bankruptcy to the end of the tax year is actually due to have tax paid on it, even thou due to an NT tax code no money is actually taken from your wages. This means that tax 'debt' would be amassed after the bankruptcy order, and thus not covered.

I.e. Say you pay £200 a month income tax.

Paid Tax on April, May, June.
Not Paid Tax on July, August.
Go Bankrupt in August.
NT Tax code applys from September til April.

So no tax is taken from the wages after august, but is still actually owed to the tax office. Meaning only year previous unpaid tax in July is covered by the BR. This would leave September til April still payable, a total of 7 x £200 = £1400.

From what i have seen, either the official receiver takes the tax to pay this debt on your behalf, until you are issued a new tax code in April, or you are left with the additional money but then have to pay up the tax debt amassed from after the bankcrupty in the following April.

So the key bit is, you do not pay any tax, but you do still owe it. And it must be paid.

Is this right?

fiveyearplan

DarkConvict wrote: »

So the key bit is, you do not pay any tax, but you do still owe it. And it must be paid.

Is this right?

You don't pay the tax to the tax man but to the OR (via MoonBeever). You do not now owe the taxman that tax but you don't get to keep it either.

crowman19

Is there an option of paying it monthly to moonbeever ?

I am going BR soon and don't want to have to save my tax each month until april to pay it to the OR, I'd rather pay it each month as I get it.

Thanks

JCS1

crowman19 wrote: »

Is there an option of paying it monthly to moonbeever ?

I am going BR soon and don't want to have to save my tax each month until april to pay it to the OR, I'd rather pay it each month as I get it.

Thanks

Yes, and moonbeever will be wanting to collect it monthly.

Think most people set up either a DD or SO for a few days after payday.

miss_spooky

Hi,

I thought it was collected monthly? We were hopig to set up a standing order to come out on the day OH's wages are paid.

Just sent forms back to OR so not heard anything from Moonbeever yet.

fermi

crowman19 wrote: »

Is there an option of paying it monthly to moonbeever ?

Unless you are self employed, then monthly payments to MB is the norm I think.

debtinfo

HMRC prove in the bankruptcy for the tax up until the new tax year for PAYE people, this is where their claim lies, not with the bankrupt.

The OR will then claim the money in an IPA between the BO and the new tax year. This is not the collection of tax for the OR or HMRC. This is the collection of surplus income that arrises because of the non paying of tax. Therefore if he does not pay it, he does not owe tax but owes the offical receiver under the terms of the IPA/O.

For S/e people the situation is slightly different Although technically the tax from the income from the business for the rest of the financial year is proved in the bankruptcy, what happens in practice is that because of the bankruptcy that business ceases and a new business starts, this means a new tax reference and therefore the bankrupt is liable for tax stratight away as soon as they start trading again.

DarkConvict

Ah so it is like a separate IPA/IPO, which the HMRC should do with the official receiver.

In his previous bankruptcy this was never done which is why he was landed with a £4000 tax bill when his tax affairs were investigated 4/5 years later.

To me, even the simplified versions sound unclear and don't just lay the terms out straight forward in a completely understandable manner. Which is where the my question really lies does anyone think this needs to be made clearer.

nervousmother

All the HMRC has to do is issue the NT tax code for the tax year during BR. For the year during BR you do not owe the tax to the HMRC you owe it to the OR.

The HMRC would not be able to recover the tax years later as it was never owed to him, it was owed to all creditors and should have gone to a company who collect it on behalf of the Official receiver (moonbeaver)