Almost a hundred years ago, 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.”
Many individuals hastily completing their tax returns this week, leaving it right until the deadline, will ignore the fact that they are entering the gradual phase of bankruptcy. The instant post-filing tax calculation might generate an equally instant debt to HMRC, immediately due since the return was sent just before the window closed, almost ten months after the previous tax year.
The debt may not be the first, adding to an unpaid balance from the previous tax return, with interest and possibly penalties rolling up.
Bankruptcies from creditors’ petitions, chiefly HMRC, have increased from historically low numbers during the Covid pandemic. The taxman’s forbearance in the circumstances, coupled with a temporarily slower court process between 2020 and 2022, is most definitely over. The authorities have even caught up with 91-year-old Bill Roache, Britain’s longest-running TV soap star from Coronation Street, over tax arrears, with HMRC issuing a petition as a “last resort”.
Mr Roache has launched a fan event, telling his best war stories and charging £20 a ticket. That should get some cash in quick and HMRC will no doubt be pleased to have it as a useful start to reducing his debt balance. Others facing an inevitable court action, after managing to kick the tax debt can down the road for a while, may not be able to raise a decent chunk of change in such short order. They must engage with HMRC sooner rather than later. Same goes for those just entering the foothills of tax debt with this week’s return.
Breathing space applications – which hold off creditor action for 60 days so that people in debt can reorganise their finances – rose by 15% year-on-year in December 2023, hitting 5,769 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.
Written by David Buchler, Chairman at Buchler Phillips, UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.