A character in Ernest Hemingway’s first novel asked a much-misquoted question: “How did you go bankrupt?”. The famous reply was: “Two ways, gradually and then suddenly.”
The forthcoming Autumn Budget may quicken the pace for many already entering the gradual phase of bankruptcy, bringing with it long-expected higher taxes on income. For those on the edge, servicing existing personal debt will become harder, particularly when combined with interest rates still above fixed mortgage products ending in the near future.
Unpaid HMRC debts will, for many, grow next year like weeds in the sun after a downpour. Balances from previous tax returns will balloon as interest and possibly penalties roll up, on top of fresh, higher amounts due.
Bankruptcies from creditors’ petitions, chiefly HMRC, have increased significantly from historically low numbers during the Covid pandemic. More than 11,000 people entered insolvency in England and Wales in September, 7% higher than in September 2024. The split was 622 bankruptcies, 3,985 debt relief orders (DROs) and 6,494 individual voluntary arrangements (IVAs).
The taxman’s forbearance in the circumstances, coupled with a temporarily slower court process between 2020 and 2022, is most definitely over. The authorities caught up with several once more-than-solvent celebrities this year, their bankruptcies serving as high profile salutary lessons – former England football ace John Barnes, and soap stars Phil Middlemiss and Martine McCutcheon lead a long list.
Others, after managing to kick the tax debt can down the road for a while, also face inevitable court action. They must engage with HMRC sooner rather than later. Same goes for those just entering the foothills of tax debt as they approach the January tax return deadline.
Breathing space applications – which hold off creditor action for 60 days so that people in debt can reorganise their finances – rose by 12% year-on-year in September, hitting 7,684 for the month. Entering into one of these may be an easy first step if the short term debt to HMRC is still relatively low.
Information on this, as well as debt support for those in poor mental health, is available here.
‘Time to Pay’ arrangements may be available for amounts below £30,000. The key message is stay on the front foot with HMRC. Engage and explore solutions. Being unresponsive only aggravates tax authorities and hastens legal action, which can become much more scary than gripping the problem. Some tax debtors may be tempted to remain ostriches after gaining successive adjournments from bankruptcy judges. Every kick of the can incurs more petition costs and more interest. It’s a mug’s game that doesn’t end well.
Dealing with significant creditors, such as HMRC, is a complex process to be navigated carefully. Individuals with a need to negotiate might consider professional advice and representation.
This article is written by Jo Milner, Managing Director at Buchler Phillips, an independent boutique firm, with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.