HMRC tax debts and bankruptcy

Sram

I am much obliged to all of you who have taken the time to reply. Thank you very much. We have a lot to think about now. This mess is not insurmountable. Thank you again.

pelirocco

If she remembers the jobs , then she just needs to fill in her returns ,.
She must have some records ? did she have bills that required her to pay money into her bank ?
Depending how much she declares I would guess on how much they believe her , you havent said if she receives financial support from family or a partner .
HMRC are approachable , but they do have a duty to collect in taxes that are due and they have to be seen to make the penalties as harsh as they can to deter people from not paying what is due , otherwise everone would be finding ways not to pay

Sram

Yes she remembers the jobs but there weren't very many to be honest and it was all arranged over the phone. Very few emails or texts to confirm the work she was doing. She just put an ad in the local paper and newsagents shop window advertising herself as a home hairdresser and she got 2 or 3 jobs a week from it.

I am of the view that if she genuinely only did 2 or 3 jobs a week for the six months or so that she was self employed then that's what she should say. But as you say, are they going to believe that? She thinks they won't and thinks it would be better for her to say she did more than she actually did.

I disagree and feel that total honesty is what is called for and that she should just tell the truth even if it sounds like she may be lying. If they don't believe her then we'll deal with that if and when it happens.

I totally get what you say about HMRC. We can discuss all day how the government wastes money on things but the fact remains people need to pay their taxes if they want an NHS and police force etc. I am all for paying taxes. Thanks again for the feedback.

Dazed_and_confused

Making up non existent income is bonkers.

It doesn't really matter whether she remembers everything at this point, the onus is on her to submit some tax returns with figures on even if these are estimates.

From what you say she didn't take much income so HMRC only actually want two figures for her self employment. Turnover and expenses, deduct one from the other and that gives you her profit (or loss).

You have to complete the returns with this information and there may be other details she needs to complete if for example she had a period of employment during the year.

Once you have worked out what to put for the self employment then filling in the returns might only take 5 minutes, if that, for each one.

If her business has ended it is important you show that on the appropriate return - there should be a box for the date the business ended on the self employment page she will need to complete.

Remember this is SELF assessment so HMRC have to recalculate her taxes based on what's on the return (may be different if the returns are very old) and THEN decide if they want to investigate further. There used to be a notes space on the return where you can include information which is irrelevant from the perspective of calculating the tax but can be used to explain things to HMRC - you would be well advised to provide a brief explanation of your sisters circumstances there.

Sram

Dazed_and_confused wrote: »

Making up non existent income is bonkers.

Completely agree. But it's hard to get through to someone who has a mental illness. They aren't thinking straight so they can easily get themselves into allsorts of trouble. Truth is best I say.

Jimbo8012

@Sram - Was your sister caught by HMRC or did she voluntarily disclose? This is a very important distinction.

FYI, voluntary disclosure is dealt with much more leniently than an investigation for tax evasion. I presume someone bulleted your cousin? Maybe a disgruntled ex boyfriend, former friend or even a family member she's fallen out with?

With regards to a voluntary disclosure, the maximum penalty a person will generally pay is a 15% late payment penalty and interest as long as accurate tax returns are submitted within 3 months from receiving a notice to complete a tax return. It’s vital that tax returns are submitted asap with regards to voluntary disclosure. The process from start to finish is all automated with no contact from a tax inspector - unless it’s a COP9 and that’s not likely here at all.

However, an investigation for tax evasion is considerably more invasive and will sometimes require a meeting with a tax inspector particularly if large amounts are owed but this doesn't seem the case here. A tax investigation is thus a more manual process than a voluntary disclosure.

If possible, I'd suggest that your sister does this all through an accountant as it consequently means minimal contact with HMRC and shows that she's taking a serious approach to this. Moreover, HMRC are FAR MORE LIKELY to take the tax owed amount at face value if they're dealing with a respectable, honest accountant who’s audited her accounts…even if there’s a lot of detail missing. HMRC just want to settle the tax debt. She needs to see an accountant asap because it seems like she lacks the competency to do this herself. Doing this herself is a really bad idea and could open herself up to significant penalties for failing to fill in a tax return properly in addition to the tax owed.

Yet, she might not owe any tax if she's under the threshold and even if she does, she can knock a substantial chunk off taxable income through expenses - this is why she needs an accountant! The amounts owed in tax are probably negligible.

Will she be made bankrupt by HMRC if she owes them tax and can’t pay? That depends on how much she owes them. Less than £5k? No and the worst-case scenario is that HMRC would go for a County Court Judgement (CCJ). More than £5k? Possibly but it's very hard to prejudge. Having zero assets but a decent income is probably the best situation to be in with regards to a HMRC tax debt. Little incentive for HMRC to go for bankruptcy as it’ll cost them a lot of money with no return. Also gives wiggle room to potentially negotiate a 'time to pay' arrangement but arrangements over a year are extraordinarily rare for private individuals.

However, if there’s a chance your sister can’t or won’t pay, HMRC will potentially make her bankrupt. Just don’t expect it to happen anytime soon. They’re a large, bureaucratic organisation that is currently underfunded, understaffed and stretched to capacity. You could be looking at 6 months easily, maybe a lot longer.

If she’s made bankrupt by HMRC, all tax debts are wiped clean by Bankruptcy but there’s a small chance that an Official Receiver would attempt to get your sister to sign a Bankruptcy Restriction Undertaking (BRU) or failing that get a Bankruptcy Restriction Order through the courts. Nevertheless, I think it’s unlikely given her mental state and likely minimal amounts owed in tax.

If she’s made Bankrupt, it won’t be great for a year or so, she may have to pay into an Income Payment Agreement (IPA) for 3 years and credit will be difficult to obtain for 6 years but it’s not the end of the world.

However, I don’t think it’ll even come to that though as I suspect the amounts owed are small. She just needs rational people like yourself to steer her in the right direction. I hope this answer helps Sram.

Sram

Thanks for that Jimbo. Unfortunately she was caught. They just called her up and asked her about her tax arrangements. I can only assume they saw her ad in the papers and found that they had no records for her so they decided to make further enquiries. Which is fair enough really. That's their job.

The amounts owed in tax should be tiny if there's any at all but it's hard to know what the final bill will be if they try to make estimates and apply penalties and interest. I think an appointment with an accountant who specialises in these sorts of things is long overdue. Thanks everyone for your help and not judging.

Pennywise

Sram wrote: »

The amounts owed in tax should be tiny if there's any at all but it's hard to know what the final bill will be if they try to make estimates and apply penalties and interest.

You're overthinking all this.

There are two completely different areas of HMRC involved.

The main area will just accept the tax return figures you submit, the figures will process through their computer system, and the interest/penalties, etc will be adjusted according to the amounts you declare. Those figures will then over-ride their existing debt collection system and the debt collectors, bailiffs or whoever will then start chasing a much smaller debt based on the figure you've "self assessed".

Probably that will be the end of it. That's what "self assessment" is all about. Mostly automatic and computerised with minimal human input until debt collection stage, and even then, the debt collectors just deal with the debt - they don't deal with whether the amounts are right or not.

However, there is a small chance that the "enquiry/investigation" section will get involved, and they're the ones who'd start to question the figures declared, they're the ones who'd have access to other records to cross check, they're the ones who'd think whether she could "live on" the declared business profits alongside her other income, such as benefits or other household member income, etc. That's a whole different arena and not really something you need to concern yourself with until it happens.

Your friend really just needs to complete her tax returns with the truth as she sees it.

Sram

Pennywise wrote: »

You're overthinking all this.
Your friend really just needs to complete her tax returns with the truth as she sees it.

Agreed and thank you again.

Jimbo8012

Sram - I'm afraid someone has bulleted her to HMRC. There's absolutely no way that HMRC has the time to go through random local newspaper ads checking to see whether someone is employed or not and/or paid their tax. I know this from experience. They've got far more important fish to fry and are chronically under funded, under staffed and overworked. Has she told anyone that she didn't pay tax?

Yes, your sister should have paid tax but she's hardly the master criminal and has mental health issues so I think it'd be harsh to be judgemental in this case. She just needs to get this sorted asap.

How many years tax evasion is she looking at?

If the tax owed is tiny, the penalties will be tiny as will the interest. The reason being that the penalties and interest are charged as a % of the tax owed. The interest % is also very low (now capped at 2.75% per year).

As a result of being caught, there will also be a discovery penalty in addition to a late payment penalty.

She needs to do this through an accountant because if there are errors in her tax return, she could be charged another penalty. They are as follows:

Innocent error: 0% penalty
Failure to take reasonable care: 0 – 30% penalty
Deliberate: 20 – 70% penalty
Deliberate with concealment: 30 – 100% penalty

Pennywise offers great advice and confirms a lot of what I've said previously that the vast majority of HMRC processes are automated.

Get your sister to see an accountant, they will then tell HMRC that your sister is a client, they'll submit tax returns on her behalf and as long as she does this within the time limits, this will override any HMRC determinations as to potential tax liability. All she has to do is pay income tax and Class 2 & 4 NI Contributions. Get it done asap.

Maybe you or another family member could pay for an accountant if she's really struggling financially? If it's for a limited numbers of years, the fee won't be enormous. Most will charge £400 to £500 a year and it's well worth it for peace of mind...for all of you.