What happens if I can't pay my tax bill?

What happens if I can't pay my tax bill?

With household bills continuing to rise, there are many taxpayers who will be struggling to pay their tax bill on time. If this is you, the biggest mistake you can make is to bury your head in the sand and ignore the problem.

If you can't pay your tax bill then you need to manage the situation, be proactive and contact your accountant or HMRC as soon as possible. You may be able to negotiate a payment arrangement with HMRC to pay what you owe by instalments. Not tackling the situation will only make matters worse.

In this blog, I'll cover the options available to you to help you deal with any tax debt that arises from your self-assessment return.

How long can I go without paying taxes?

If you can't pay your self-assessment income tax bill, you will be charged late payment penalties when your payment is 30 days late. You will also be charged a penalty again when your payment if 6 and 12 months late. HM Revenue and Customs (HMRC) are likely to charge interest for late payment.

Calculating your self-assessment tax bill correctly

Before you take any action, it’s important to understand how much tax you may owe and be sure this amount is correct.

Ensuring your self-assessment tax return is completed and using an accountant to manage your tax affairs is recommended.

Can I be late on paying taxes?

If you delay paying your tax you will be charged penalties by HMRC. These will be dependent on how late you are in paying.

Penalties can mount up and you are likely to pay interest on any money you owe to HMRC, so your debt can easily accrue with HMRC if you don't make arrangements or pay anything towards your tax bills.

What are the penalties for sending a late tax return?

If you don't think you can pay your tax bill, then simply burying your head in the sand and not filing your tax return will cost you more in the long run as you will be charged penalties by HMRC for not sending your tax return in on time. You will incur a £100 late filing fee even if you are 1 day late filing your tax return. Penalties and interest then accrue over time and these late filing penalties will be in addition to any penalties for paying your tax late. You can find out more about late payment penalties here.

Pay your taxes on time with HWCA tax advisory services:

Tax Advisory

What happens if you owe taxes but can't pay?

HMRC will do everything to help you with debt management of your tax bill before they take any other action. This may take the form of a time to pay arrangement, use any overpaid tax you may have to pay off the debt or adjust your tax code to collect the outstanding amount.

If you don't engage with HMRC, they may take enforcement action including:

• visit you at your home or business address to help understand your circumstances so they can work with you to settle the tax you owe
• use a debt collection agency to discuss settling your debt

Can HMRC take money from my bank account?

The simple answer is yes. However, this action is a last resort for HMRC, as they will look at the other measures above first.

Creditors like HMRC can recover debts directly from customers’ bank and building society accounts. This is called ‘direct recovery of debt’.

The measure is aimed at those debtors who have repeatedly ignored attempts by HMRC to collect tax debts owed, despite having the means to pay.

For HMRC, this can apply to customers in England, Wales and Northern Ireland who:

• owe £1,000 or more
• have enough funds in their bank accounts to cover the debt and their reasonable living costs

In Scotland, a Summary Warrant can be used.

There are strict rules to make sure:

• customers do not suffer serious difficulty due to money being taken directly from their accounts
• enough protection is in place for vulnerable customers

What are the options for repaying owed taxes?

Once you understand what you owe and you understand how much you can or can’t afford, then you will need to take action as soon as possible. It is better for you to act quickly and contact HMRC to understand the support available to you and agree an arrangement for a payment plan.

Will HMRC let me pay in instalments?

HMRC may offer you the ability to pay what you owe in instalments. This is called a Time to Pay arrangement.

If you’re situation is more complex or you don’t fulfil the criteria above for organising your payment plan online, then you’ll need to contact HMRC directly.

Often, it’s possible to negotiate payment of your tax bill over a 6 to 12 month period as long as HMRC are satisfied that you can’t afford to pay the whole amount now. An instalment arrangement is entirely at HMRC’s discretion.

Setting up Time to Pay arrangement online via Government Gateway

It’s possible to set up this type of arrangement online using your Government Gateway account or by contacting HMRC's self-assessment payment helpline if you:

• have filed your latest tax return
• owe less than £30,000
• are within 60 days of the payment deadline
• plan to pay your debt off within the next 12 months or less

Using the online service means you won’t be asked for such detailed information about your income and expenditure that you would if you call HMRC to negotiate. You’ll only need to contact HMRC directly if you need to change the arrangement or want to ask questions or report a change in circumstances.

Using this online service, you’ll be able to settle your bill by monthly direct debit payments over a period of up to 12 months. You will also have the option of paying a lump sum amount up front to reduce the monthly instalments.

Often, it’s possible to negotiate payment of your tax bill over a 6 to 12 month period as long as HMRC are satisfied that you can’t afford to pay the whole amount now. An instalment arrangement is entirely at HMRC’s discretion.

What to do if you’re contacted by a Debt Collection Agency (DCA)

If you act proactively and tackle the problem of not being able to pay, then you should not be contacted by a Debt Collection Agency. However, be aware that HMRC do use debt collection agencies to chase taxpayers who owe HMRC money. If you are contacted by such an agency, they should act in a similar manner to HMRC themselves.

You can check the agency is genuine by comparing it to the list on the Gov.uk website.

DCAs have broadly the same powers as HMRC to agree time to pay over up to 12 months. DCAs are authorised to contact taxpayers by phone and letter - they don’t carry out personal visits. If the DCA fails to reach an agreement with you, they will refer the case back to HMRC to consider further enforcement action.

FAQs

Does HMRC debt affect credit rating?

HMRC and other tax debts won't affect your credit rating. This is simply because when you owe money to HMRC, you haven’t taken out any credit. However, when you get into debt through a credit card, loan or mortgage, you take out credit with the agreement to pay it back. HMRC debts are money owed to the UK Government, but the UK Government hasn’t given you any credit up front. Therefore, your tax debts will not impact your credit score.

However, tax debts should be treated very seriously as it is possible for HMRC to call in a debt collection agency, bailiffs and declare you bankrupt, which would greatly reduce your chances of getting credit in the future.

What is a time to pay arrangement?

As with any issues with cash flow, having the ability to pay a bill over a longer period may enable you to get through this difficult phase. HMRC can offer a ‘Time to Pay’ arrangement. So, once you’ve completed your tax return and know what you owe, you can apply to HMRC to pay via instalments through this type of arrangement.

Conclusion

If you think you’ll struggle to pay your tax bill this year, then contact your accountant in the first instance and seek professional advice. They will be able to help and advise you on a course of action. They’ll also be there to help to negotiate with HMRC if that is needed.

Contact us if you need more help or advice with managing the payment of your tax bill or have queries on your tax return.