HMRC tax debts and bankruptcy

Sram

My sister suffers from bipolar and struggled to get a job so she decided to try going self employed for a while but it didn't work out. She didn't really know what she was doing partly due to her mental health problems and partly due to naivety. She didn't know that she had to register herself as self employed and she didn't declare any of her income believing that because she was earning under the tax threshold she didn't need to pay income tax and therefore wasn't required to declare.

Now she's being asked to pay lots of money that she can't possibly afford. She can't prove what she earned when she was self employed so the taxman is simply making an estimate which is way more than she made. They are adding interest and penalties too. This has put her in a very dark place.

I have read that fraudulent debts are not discharged after bankruptcy but I don't know if that includes income tax debts. Is bankruptcy likely to wipe her HMRC debts even if the taxman view what she did as deliberate concealment/fraud?

Dazed_and_confused

It seems likely she needs to submit some self assessment tax returns.

Could you help her with this? She doesn't have to "prove" anything when filling in the return and if she doesn't have accurate details she'd have to use estimates.

It would be upto HMRC to then decide whether to challenge the estimates but if an explanation of her circumstances was included in the notes space on the return(s) that may mitigate the chances of her being investigated.

It would need some work from you but could ultimately be of great help to your sister?

Sram

Thanks for your reply. I am happy to help her in anyway I can. HMRC haven't said that they regard what she did as fraud but they haven't said it isn't either.

She cannot possibly pay what they're asking so bankruptcy is on the cards. I just don't know if it will wipe her debts and let her start again. If it doesn't then there's no point in doing it just so she will be met with the same debts that she had before the bankruptcy.

From the little I've read online about this subject HMRC can and do make people with zero assets bankrupt. I have no idea why the do this because they still don't get their money. If the debts are through fraud they will not be discharged after the bankruptcy, so what do HMRC do then? Make the penniless asset free debtor bankrupt again?
Seems utterly senseless to me.

Pennywise

Sram wrote: »

I have no idea why the do this because they still don't get their money.

It's the only sanction/punishment they have for people who won't engage with them properly re their tax affairs.

To avoid bankruptcy, she needs to submit the outstanding tax returns as said above. Until the tax returns are submitted, HMRC have no way of knowing her profits, any tax liabilities, etc., and will continue to issue demands, and, yes, ultimately make her bankrupt.

Surely, she will have some records or remember what she was doing? These days, there's usually an electronic trail that can be reconstructed, i.e. checking back on emails, contacting her bank for copy bank statements, asking her suppliers and customers for their records of transactions with her? She must have some memory/records if she's so sure that her profits were so low. You need to find out what information is available and then build estimates around that to produce some estimated figures so that the tax returns can be submitted.

Once submitted, she can have useful dialogue with HMRC to sort out this mess.

She needs to contact them now, today, to apologise for ignoring her tax responsibilities and to assure them that she's going to comply from now on and submit her outstanding tax returns, then ask for proceedings against her to be suspended whilst she does that.

Sram

Thanks pennywise.

She does remember the jobs she did. But it seems that HMRC can simply say "we don't believe you so we're going to charge the tax on the jobs we think you've done" even without any proof and it's for her to prove their estimates are wrong. Even drug dealers are innocent until proven guilty but not taxpayers it would seem.

She stopped trading months ago and will not be working anymore. She was a hairdresser who placed an ad in the local papers and got work through that but because she wasn't earning very much she genuinely didn't think of herself as a proper business that needed to be registered. I know that people will say she must have known her responsibilities but many people with small incomes get caught out like this it seems. Ebay sellers fall into this trap quite a bit I've heard. Where they just sell a little on the side without giving a second thought to the tax implications because their operations are so small. And then HMRC come knocking.

I fear no matter what she puts on her self assessments hmrc will not believe her and just make it up but that's what she needs to do anyway. She says she's tempted to write more work than she actually did just to make it more believable in the hope that they will accept what she's saying as true and stop this estimate nonsense. But I've said no just tell the truth about what you did and if they choose not to believe you then we'll take it from there. Honesty is the best policy. It's been a hard lesson.

antonic

In these cases I would recommend that she makes HMRC aware of her illness and ask that she be referred to the Needs Enhanced Support Team, who *should* then provide the support she needs to resolve this problem.
It will be incumbent on her to file any outstanding returns so both HMRC and her, know what her true level of debt is.
In my experience, HMRC does not like to make people with no assests bankrupt as it costs HMRC a fortune to make people bankrupt.
Hope this helps.

HothHan

I recently went bankrupt in a similar position, suffering with depression and unpaid income tax of approx 9k, plus a lot of personal debt.
To put your mind at ease, being mentally unwell, poor at record keeping and not being aware that you owed any tax does not amount to fraud... EVER
The official Receiver confirmed that any unpaid income tax owed to HMRC prior to the bankruptcy date will be included in the Bankruptcy, and treated like any other debt. As soon as my bankruptcy was confirmed I called HMRC and gave them my reference number and advised them that the Official Receiver will be in touch in due course. I've not heard a peep from them since.

Sram

HothHan wrote: »

To put your mind at ease, being mentally unwell, poor at record keeping and not being aware that you owed any tax does not amount to fraud... EVER

That's a pretty bold statement. Don't get me wrong I'm glad to hear you say it but what makes you so certain?

antrobus

Sram wrote: »

That's a pretty bold statement. Don't get me wrong I'm glad to hear you say it but what makes you so certain?

Tax fraud includes tax evasion, where an individual or company avoids their tax liability by deliberately failing to declare their income, or by falsifying expenses. It also includes smuggling goods that are liable to excise duty, customs duty or VAT.

http://www.actionfraud.police.uk/fraud-az-tax-fraud

Not declaring income to HMRC would be tax evasion and potentially tax fraud if it was deliberate.

I would follow Pennywise's advice above. HMRC standard practice is to hit people with 'estimated assessments' that will frighten the life out of them. It is incentive to begin negotiations.

Your sister will not be prosecuted for fraud.

HothHan

Sram wrote: »

That's a pretty bold statement. Don't get me wrong I'm glad to hear you say it but what makes you so certain?

"not being aware that you owed any tax" is the key to me being so bold. If you know you owe it then choose not to pay or inform HMRC then it's classed as tax evasion which is a prosecutable offence.

National_Debtline

Hi Sram

The first thing I would advise your sister to do is make sure HMRC are aware of her mental health issues and that she is a potentially vulnerable person.

It can be difficult to try to complete tax returns with very little information to go on. If your sister is on a low income (below £20,000) she can seek specialist tax advice from TaxAid. They are a charity run by tax specialists who can help people on low incomes with disputed tax debt www.taxaid.org.uk.

Not completing tax returns would not be grounds for a tax debt not to be written off in bankruptcy, although it could possibly lead to a bankruptcy restriction order. You may find that once your sister has had specialist advice on dealing with the tax returns that the debt will be significantly reduced. This may mean she does not have to consider bankruptcy at all, or she may qualify for a different option such as a debt relief order. I hope it all goes well.

Susie
@natdebtline