Part 3 Income to be considered in an income payments calculation
Various potential income sources may be available to the bankrupt and can be considered by the official receiver/trustee when making an IPA/IPO calculation. Suggested possible sources of income follow, but the list is not exhaustive:
Employment and self-employment (including foster care income)
Arrears of benefits received post bankruptcy
Periodic payments in respect of loss of earnings/personal injury/redundancy
Income arising from capital property (including rents) and mortgage payment “holidays”
Tax refunds and reliefs
Income arising from nil tax (NT) coding
Income received from spouse/civil partner/partner
Income from adult children and other adult members of household
Maintenance payments income
Student loan income
Where a lump sum bonus payment is received prior to bankruptcy, any sum remaining at the date of the bankruptcy order will vest in the bankruptcy estate as “cash at bank” and can be claimed as an asset in the normal way. Where a bankrupt is in receipt of earned income, and a bonus or overtime payment is received by him/her post bankruptcy, this should be considered as income within the terms of IA86 section 310(7) and included in any income payments calculation. Bonus income can be claimed via an IPA, either as a lump sum (in the same way as pension lump sum payments are claimable, see paragraph 31.7.52) or incorporated into monthly payments. If a bonus is paid to the (former) bankrupt whilst an IPA is already in force, the IPA may be varied to claim the bonus, including where the bonus is received after discharge. As with all income calculations, the bonus can only be claimed in circumstances where the bankrupt otherwise has sufficient funds to meet their reasonable domestic needs, see Annex B & Annex C for example calculations which illustrate this.
A bankrupt may be in receipt of or due to receive a bonus from his/her employer which is paid under a Trust Settlement. An example of this is the John Lewis partnership bonus paid annually to all partners (employees) as a percentage of salary, the amount of the percentage being dependent on the business profits made in the previous year. Any cash bonus in hand as at the date of bankruptcy will be an asset of the estate, but where the bankrupt is due to receive his/her bonus after the date of the bankruptcy order, the official receiver may encounter the problem that the Trust Settlement precludes the bonus from being paid to an undischarged bankrupt where it will be claimed by the trustee of his/her estate, as is the case in the John Lewis scheme. If the official receiver is unsure how to proceed in these circumstances he/she should consult Technical Section. The trustees of the scheme may seek an unequivocal statement that the trustee in bankruptcy will have no claim on the money, either now or in the future. It is open to the official receiver to decline to make such a statement, and in the absence of such a statement, the bankrupt will not receive their bonus payment, and the monies will not be available to be claimed.
As an alternative to losing the entire payment, the official receiver may seek to agree in principle a voluntary agreement with the bankrupt, such that after the bankrupt has received his/her bonus payment, he/she agrees to pay a voluntary payment to the official receiver to be paid into his/her bankruptcy estate. It is suggested that a minimum 50% of the bonus received should be requested as a voluntary payment to the estate.
Where the bankrupt is in paid regular employment and can provide details of his/her reasonable expenditure, it should be possible for the official receiver to easily identify whether there is a surplus of income over expenditure which can be collected under an IPA/IPO. Where a bankrupt is self-employed, although the income he/she receives may be a variable amount each month, it should still be possible for the official receiver to identify whether the bankrupt will have a surplus of income after allowing for reasonable expenditure. This may be done in a number of ways and may require the official receiver to review the bankrupt's circumstances more frequently than in cases where the IPA/IPO is based on income received as a result of being in receipt of a regular wage.
Examples of possible means by which surplus income can be claimed from a bankrupt who is self-employed include considering an average of the bankrupt's income received over a given period, through analysis of any records or accounts supplied to the official receiver, and then agreeing a monthly (or quarterly) repayment with the bankrupt based on the average surplus income calculated. The examiner should ensure that an allowance for tax and national insurance contributions is included in any calculation.
In other cases where the bankrupt's income varies on a seasonal basis, it may be possible to agree an IPA which covers only the specific period when the bankrupt is in receipt of surplus income (e.g. for a six month period in the summer or winter depending on the nature of the seasonal income).
In circumstances where the bankrupt is in receipt of staged payments (such as those received by building contractors) or is paid on a commission basis (such as a self-employed sales person) their basic salary may provide insufficient income for an IPA, but in conjunction with staged payments/non- monthly commission income received may provide adequate surplus to agree an IPA. In these circumstances if appropriate, the official receiver could propose an agreement with the bankrupt for him/her to pay (for example) bi-annual or annual contributions. In these cases the official receiver can agree the particular payment terms within the IPA, to be signed and agreed by the bankrupt. As always, the period of the IPA/IPO must not exceed three years from the date of commencement of the agreement or order.
Where a bankrupt is due to receive pay in lieu of notice, or where he/she is due to receive a redundancy payment which includes an element of pay in lieu of notice, the payment in lieu of notice represents compensation paid where the employer elects not to give a statutory period of notice. This payment does not represent “wages” during the notice period. Pay in lieu of notice may be subject to tax, see HMRC website at: http://www.hmrc.gov.uk/manuals/eimanual/EIM12976.htm
A payment in lieu of notice is compensation for lack of notice, not a payment for loss of earnings, and should be claimed as an asset of the estate if paid to the bankrupt before the date of the bankruptcy order, and as after acquired property if paid after the date of the bankruptcy order.
Where an employer is insolvent the Redundancy Payments Service (RPS) will pay a compensatory notice payment (CNP) to the employee (bankrupt) instead of pay in lieu. This payment is limited by statute and subject to mitigation; the amount paid is reduced by any earnings or benefit entitlement during the statutory notice period. A CNP should be claimed as after acquired property.
Where a bankrupt is in receipt of foster care allowance this should be treated as income and included in the income payments calculation. HMRC website at http://www.hmrc.gov.uk/individuals/foster-carers.htm confirms that where a child or young person has been placed with an individual by either a local authority or independent fostering provider, that individual is considered to be self-employed. Where total receipts exceed the qualifying amount (calculated by adding together a fixed sum per household and the amount per week received according to the number and age of the child/children fostered) tax is due on any surplus income above the qualifying amount (see website for further details on how this is calculated. If the foster carer is not in receipt of any surplus above the qualifying amount, no tax will be due.
When including such income in an income payments calculation it is necessary to establish whether the income is received jointly with another foster carer or whether it is received entirely by the bankrupt as sole foster carer, as this will make a difference to the amount of income available against which a calculation can be made. All expenses associated with the care of the children subject to foster care must also be considered in the calculation where the foster care income is included.
31.7.40IPA or IPO should not be sought where bankrupt’s sole income comprises state benefits
An IPA or IPO should not be sought where the bankrupt's only source of income is state benefits. In the context of this chapter "state benefits” refers to all forms of income supplement and support provided by central or local government including, but not limited to: income support, job seekers allowance, disability living allowances, incapacity benefit, industrial injuries disablement, council tax benefit, housing benefit, state retirement benefit (state pension), child benefit and all forms of tax credit (child, working and pension). There is no requirement to undertake an assessment of real disposable income where the only source of the bankrupt's income is state benefits. In all other cases an assessment should be made even if part of the household income is derived from state benefits.
The Department of Work and Pensions website provides useful information regarding allowances and benefits currently in force and can be accessed at http://www.dwp.gov.uk/.
31.7.41State benefit income to be included where bankrupt also receives non-benefit income
The official receiver should not automatically discount the possibility of obtaining a contribution from a bankrupt who is in receipt of benefit. The Service has obtained legal advice that once a benefit is paid to an individual, it may be considered to be income and so falls within the scope of section 310(7) of the Insolvency Act 1986. Whilst this confirms the possibility of obtaining an IPA/IPO where a bankrupt is in receipt of state benefits, as a matter of policy as stated at paragraph 31.7.40, the official receiver should not seek an IPA or IPO, where the bankrupt's only source of income is state benefits.
31.7.42 Establishing real disposable income
Where a bankrupt is in receipt of benefit income and non-benefit income, the official receiver should take into account all income sources (with reference to the guidance on income sources at paragraph 31.7.32), including any state benefits which the bankrupt or his/her family members, are entitled to receive. The reasonable domestic expenses of the bankrupt and his/her family should be deducted from this total income (see paragraph 31.7.80) to establish his/her real disposable income. An assessment can then be made as to whether the bankrupt has surplus income from which to support an IPA or IPO.
31.7.43IPA/IPO contribution should not exceed non-benefit income (amended April 2012)
When dealing with an income payments calculation which includes elements of benefit income, it will be necessary to take into consideration whether the bankrupt has sufficient non-benefit income i.e. earned income, receipts from a private or occupational pension (see section (d) of this part), foster care payments (refer to paragraph 31.7.39) etc., from which an income payments contribution can be taken. An IPA/IPO assessment can still be made using the Income payments calculator, but if an IPA/IPO is to be sought, the amount of any payment must not exceed the income from the source other than state benefits. Examples of calculations and the adjustments to be made where the bankrupt is in receipt of benefit income can be found at Annex A. It should be remembered that whilst the bankrupt's total income (including state benefits) can be included in the calculation of surplus income, it is the income from sources other than the benefit(s) which is providing the payments under the IPA/IPO, which is why an IPA/IPO should only be sought from the non-benefit income.
31.7.44 Claiming arrears of benefits received post bankruptcywhere bankrupt also has non-benefit income (IPA/IPO)
Where the bankrupt receives a payment of benefit arrears post bankruptcy (and is in receipt of other (earned) income), the official receiver can include the benefit arrears payment as a source of income to be included in an income payments calculation. If, by including the benefit income the bankrupt has sufficient surplus income (from non-benefit income), from which to make an IPA contribution, an IPA can be agreed.
It is suggested when calculating an IPA to include arrears of benefit income, the amount of the arrears is divided by 12 months (treating it as an “income boost” over the period of a year) and the corresponding monthly amount included in the calculation over a 12 month period.
(a) New IPA agreed
Where a new IPA is being agreed (including the benefit income) as the bankrupt did not previously have sufficient surplus income from which to make a contribution, the IPA should be paid at the assessed rate for 12 months, and then at a reduced or nil rate (based on an assessment of the bankrupt’s income without the arrears included) for the months remaining under the IPA (i.e. 24 months). The IPA contribution must be equivalent to or less than the income derived from non-benefit sources.
(b) Existing IPA to be varied
Where there is an existing agreement already in force this can be varied to include the benefit arrears and vary the agreement to include a temporary 12 month increase in payments. The payment amount can then revert to the previously agreed monthly payment amount for the balance of the term of the IPA agreement (to the end of the maximum possible term of 36 months). In the event that the bankrupt’s income changes again the IPA can be further reviewed.
If an IPA cannot be agreed with the bankrupt, then the official receiver can consider applying to court for an IPO to recover increased surplus income available as a result of the payment of the benefit arrears.
31.7.45 Pension receipts generallyPension benefits are generally paid in two parts, a tax free lump sum and a monthly or annual payment following retirement until the individual dies. The recipient can elect to forego a lump sum payment in favour of a larger monthly payment. Where the pension fund is small (currently less than £18,000) the individual can elect to take the whole of the fund as a single lump sum payment (see chapter 61 paragraph 61.36).
31.7.46 Pension receipts already in payment at the date of the bankruptcy order
Where the bankrupt has received his/her pension prior to the bankruptcy order date, it is likely he/she will already be in receipt of the annual/monthly payment at the date of the bankruptcy order. This income can be included in the income payment calculation to assess the bankrupt's real disposable income. Where the bankrupt has received a pension lump sum prior to the bankruptcy, if it has not already been spent at the date of the bankruptcy order, this lump sum remaining will vest in the bankruptcy estate as 'cash at bank'.
See also paragraph 31.7.52 and Annexes B & C for guidance on the assessment of real disposable income where the official receiver seeks to claim a lump sum pension payment received after the commencement of bankruptcy.
The decision on how and when to receive pension benefits lies with the debtor and their financial advisors and not the official receiver.
31.7.47Reasonable domestic needs to be considered when claiming monies arising from pension receipts
As with all income payment calculations, where pension income is included the official receiver must take in to consideration the reasonable domestic needs of the bankrupt and his/her family. No IPA/IPO should be sought where the effect would be to reduce the income of the bankrupt below the level considered necessary to meet the reasonable domestic needs of the bankrupt and his/her family.
All benefits paid under a pension arrangement should be considered for the purposes of an IPA/IPO and should not be claimed as after-acquired property under section 307 of the Insolvency Act 1986. When a private pension comes into payment the pensioner has a fund of money which is then transferred into an approved annuity to provide a regular income. The annuity policy does not vest in the bankruptcy estate [note 1] but income from the annuity can be included in an income payments calculation. If the bankrupt is in receipt of this annuity income from a pension at the date of a bankruptcy order, or a pension is brought into payment whilst the bankrupt remains undischarged from the proceedings, this income can be included in any calculation for an IPA/IPO. See also Chapter 61 paragraphs 61.3 and 61.7 for more detailed information on pension schemes.
The exceptions to pension income which can be collected under an IPA/IPO are payments by way of a guaranteed minimum pension, and payments giving effect to the bankrupt’s protected rights as a member of a pension scheme. Guaranteed minimum pension, and protected rights are defined in the Pension Schemes Act 1993 [note 2].
Where the bankrupt is in receipt of a guaranteed minimum pension or has protected rights, the income can be included in the income payments calculation, but the amount of any contribution must be equal to or less than the other income received by the bankrupt, as with benefit income (see paragraph 31.7.43).
31.7.50 Income from Armed Forces and War Disablement pensionsWhere a bankrupt is in receipt of pension income from an Armed Forces Pension or War Disablement pension, this income should be included in any income payments calculation, together with any other income received by the bankrupt. The official receiver should consider whether there are any additional or higher expenses which must be considered as a result of the disability for which the War Disablement pension is being paid, and apply the usual considerations with regard to reasonable domestic need, see Part 1 Section 3 and paragraphs 31.7.22 and 31.7.129.
31.7.51 Variation of an existing IPA/IPO to include pension receiptsWhere an IPA/IPO is in force and the official receiver/trustee becomes aware that a bankrupt is likely to attain retirement age during the period of the IPA/IPO, they should be made aware that their pension entitlement may be affected and the income received from the pension may be claimed through a variation of the existing order or agreement, either in whole or in part (see also paragraphs 31.7.48 and 31.7.52, and Chapter 61 paragraph 61.27.
Generally a bankrupt is likely to have an overall reduction in their income following retirement. In the majority of cases an existing IPA/IPO will be reduced or varied to nil following retirement. In a small number of cases the bankrupt's financial position may improve post retirement allowing an increase in the IPA or IPO or, where the bankrupt is undischarged, the commencement of an IPA/IPO.
31.7.52 Lump sum pension payments received after bankruptcy and before discharge
Where the official receiver becomes aware that the bankrupt (prior to discharge) is due to receive payment from a pension, the official receiver may seek to agree an IPA with the undischarged bankrupt to recover any lump sum. If this is not possible to agree, he/she may apply to court for an income payments order to recover any lump sum, and may include other pension payments in the calculation for income in his/her application.
The lump sum payment might be claimed as a single payment or final payment under an IPO/A but only in circumstances where the bankrupt otherwise has sufficient funds to meet their reasonable domestic needs. As a consequence where a lump sum is available the calculation of real disposable income is a two-stage process. Guidance and example calculations on the assessment of real disposable income in circumstances where the official receiver seeks to claim a lump sum payment via an IPA/IPO are included at Annex B and Annex C.
31.7.53Periodic payments received in respect of personal injury and medical care
Under section 101(4) of the Courts Act 2003, [note 3] the bankrupt's right to receive periodic payments in respect of personal injury will not form part of the bankrupt’s estate. This means that the bankrupt will continue to receive periodic payments in respect of personal injury before, during, and after, bankruptcy. Section 101(4)(c) of the Courts Act 2003 [note 3] further states that periodic payments received by the bankrupt in respect of personal injury care and medical costs during the period of bankruptcy cannot be subject to the IPA/IPO provisions as they do not form part of the bankrupt's estate.
31.7.54Payments received post bankruptcy in respect of loss of earnings to be included in an IPA/IPO
Periodic payments in respect of loss of earnings remain subject to the IPA/IPO provisions of the insolvency legislation and should be included in an IPA/IPO calculation. Any wages received whilst an individual works out a notice period, holiday pay or arrears of wages should also be included in an IPA/IPO calculation.
31.7.55Redundancy payments to be claimed as a bankruptcy asset
(amended February 2012)
With regard to redundancy payments, it should be noted that any periodic payments in respect of redundancy represent compensation for the loss of a job (see Chapter 31.5, paragraph 31.5.14), and a redundancy payment whether received before or after the making of the bankruptcy order is an asset of the bankruptcy estate and should be realised accordingly, it should not be treated as income or be included in an IPA. See Chapter 31.5 paragraph 31.5.15. Where redundancy occurs after the making of the bankruptcy order, any redundancy payment may be claimed as an after-acquired asset.
31.7.56Funds arising from capital property
Where the bankrupt has an interest in capital assets as at the date of bankruptcy, e.g. bank accounts, property, shares etc, these are vested assets and should be realized within the bankruptcy proceedings. Any income arising from the ownership of the vested asset (e.g. dividend income arising from shares held) will also be claimed as an asset which vests in the bankruptcy estate. In the same way if the bankrupt receives a capital asset post bankruptcy (but prior to discharge) the asset can be claimed as after acquired property and any income or payments arising from ownership of the asset (such as dividend income) will vest in the bankruptcy estate. For further information on realising monetary assets (including funds received from trusts) see Chapter 31.5, Part 2 and for further information on claiming shares as after acquired property see Chapter 31.8 Part 3, in particular paragraph 31.8.50 regarding shares. For more detailed information on collecting rental income when dealing with tenanted properties please refer to Chapter 31.11 for solely owned tenanted property and Chapter 31.12 for jointly owned tenanted property.
31.7.57 Rental income from property owned by the bankrupt
Where, at the date of the bankruptcy order, the bankrupt is living in rented accommodation but is also renting out a property which he/she solely owns, the official receiver/trustee should collect the rental income for as long as there is a valid tenancy in place. As a result of the vesting of the property in the bankruptcy estate, the rental income belongs to the trustee directly and should not be included in the income payments calculation. Where the bankrupt has a beneficial interest in a jointly owned property, the solvent joint owner can collect the rent but must account to the official receiver for the profits.
Deductions from the rent may be allowed to cover payments the landlord is obliged to pay under the tenancy agreement (i.e. council tax) and the costs of repairs or maintenance. Where the property is rented out, if the mortgagee takes possession of the property, or appoints a receiver to collect rents, this will entitle the mortgagee to receive the rental income being generated by the property, but until that happens, the income is an asset vesting in the bankruptcy estate and should be collected by the trustee.
For more detailed information on collecting rental income when dealing with tenanted properties please refer to Chapter 31.11 for solely owned tenanted property (paragraphs 31.11.29 to 31.11.35 where receiver and manager and 31.11.98 to 31.11.108 where trustee) and Chapter 31.12 for jointly owned tenanted property (paragraphs 31.12.96 to 31.12.105).
31.7.58 Exceptions where rental income should not be collected
There are some exceptions where rent should not be collected, where for example there is a tenant who has defaulted on his/her obligations, or a squatter or a tenant in the premises who has stayed on after being given valid notice to quit. To collect rent in these circumstances may validate an otherwise invalid tenancy, to the detriment of the value of the property and the bankruptcy estate. For more information please refer to Chapter 31.11 for solely owned tenanted property (paragraphs 31.11.29 to 31.11.35 where receiver and manager and 31.11.98 to 31.11.108 where trustee) and Chapter 31.12 for jointly owned tenanted property (paragraphs 31.12.96 to 31.12.105).
Section (g) Tax refunds and reliefs
31.7.59Tax refunds up to and including the year of bankruptcy
31.7.60Claiming tax refunds under an IPA/IPO for years subsequent to year of bankruptcy
Any refund in respect of tax years following the tax year in which the bankruptcy order was made may be claimed by means of an income payments agreement/income payments order (IPA/IPO) where the bankrupt remains undischarged. The IPA should clearly state what is being claimed and the IPA agreement accepted and signed by the bankrupt and the official receiver/trustee prior to discharge in order for it to become valid. If the bankrupt fails to agree the IPA/give consent the trustee may still recover the tax refund by applying for an IPO (stating clearly in the IPO application what is being claimed) as long as the application is instituted prior to the date of discharge [Note 4]. See also Chapter 31.5 paragraph 31.5.71 and Chapter 77, paragraph 77.62.
31.7.61Children’s tax credit relief
Between 6 April 2001 and 5 April 2003 households which included any children under the age of 16 were entitled to claim children's tax credit relief. This was a tax allowance, which was not means tested, and was worth around £529 per year to the taxpayer concerned. If a child was born in this period there was an additional relief of £520 available in the financial year of the birth. The children’s tax credit relief allowance was replaced in the financial year 2003/04 by the current system of child tax credits, which is a means tested benefit. Guidance on dealing with arrears of benefit is provided at Section (c) of this part.
During 2009 HMRC ran a publicity campaign to encourage claims from those who may have been eligible for this tax credit relief available between 2001 and 2003, but who were not previously aware of their eligibility. As a result of this campaign payments have been made to successful applicants. A successful claim for the tax years 2001/02 and 2002/03 means that the claimant paid more tax than they should in that financial year and they are entitled to a tax refund, and as the children's tax credit relief is a tax allowance, the 'payments' were made by way of an adjustment to the recipient's tax code. Where a bankrupt has applied for this tax refund and received the monies prior to the date of the bankruptcy order, any monies remaining from the tax refund are an asset of the estate and can be claimed in the same way as cash at bank.
Where a bankrupt expects to receive this tax refund after the date of the bankruptcy order HMRC will pay the tax refund directly to the official receiver and the monies form part of the bankruptcy estate.
31.7.62Notification of bankruptcy to HMRC
(amended February 2012)
The Insolvency Claims Handling Unit (ICHU) at HMRC deals with claims in insolvency proceedings relating to both tax and national insurance. Data on new bankruptcy cases is automatically sent to the HMRC Insolvency Unit at Longbenton which has the effect of notifying HMRC (local tax office) of the bankruptcy proceedings. It also enables the local tax office to identify any refund of tax for payment to the official receiver/trustee, and also to apply the “nil tax” (NT) coding to the bankrupt's income as appropriate (see section (h)). The data is collected 3 days after it has been input into ISCIS and sent automatically to HMRC on Monday, Tuesday and Friday. There is no longer any requirement to send a paper copy of the information. It will still be necessary for the bankrupt to complete a tax and national insurance disclosure authority form (form TNIDIS), which should be retained until required. The copy of the TNIDIS form should be sent to HMRC, PO BOX 1000, Newcastle Upon Tyne, NE98 1WY, there is no need for a further copy of the form to be sent to the bankrupt’s local tax office. The original TNIDIS form should remain with the official receiver. See also Chapter 4, paragraph 4.64 and the Case Help Manual chapter Initial notices and letters, paragraph 20 “Notice to government departments”.
Section (h) Income arising from nil tax (NT) coding
31.7.63Income arising from nil tax (NT) coding
Where bankruptcy occurs, HMRC submits a claim in the bankruptcy proceedings for the whole of the outstanding tax due in that tax year, for both employed and self-employed individuals. The claim submitted in the proceedings by HMRC is dealt with in the same way as any other unsecured creditor. Where a bankrupt is employed on a PAYE basis he/she will have a tax code issued to them which enables their employer (or pension provider) to calculate the amount of tax to deduct from their salary. Where a bankrupt is in PAYE employment at the date of bankruptcy and remains with the same employer, HMRC applies a nil or no tax (NT) code to the bankrupt's salary for the remainder of the tax year in which the bankruptcy order is made, as a consequence of submitting its claim for outstanding tax in the bankruptcy proceedings. The NT code is applied to all income earned by the bankrupt after the bankruptcy order date, either until such time as there is a change in the bankrupt's source of income (i.e. he/she obtains a new job with a different employer, see paragraph 31.7.65), or until the end of the tax year in which the bankruptcy occurs, whichever event is the earliest. This means the bankrupt does not pay any tax on his/her income whilst the NT code is in force and so receives additional income which can be included in the income payments calculation.
31.7.64Effect of NT coding on other income sources (e.g. benefit income or CSA payments)
As the application of the NT code raises the debtor’s income, it can affect the payment of some benefits, which may ultimately lead to a reduction in the amount of surplus available to the bankrupt from which to make a payment under an IPA/IPO. Where the bankrupt’s income is reduced as a consequence of re-assessment of part of his/her income (e.g. housing benefit) or an award in other proceedings (e.g. a CSA payment), then the IPA should be varied to reflect the change in the available surplus income.
31.7.65Change in income source removes NT coding
If the bankrupt changes income source/employer during the course of the tax year in which he/she is made bankrupt (which could include becoming self - employed having previously been PAYE employed), HMRC deems this to be a change in source of income, and a new tax code will be issued. The bankrupt will be required to pay tax on his/her earnings from the date of the change. For further information refer to Chapter 77 paragraphs 77.23 and 77.35. The bankrupt also becomes liable for tax again on any income received from the start of the tax year following the year in which bankruptcy occurs.
31.7.66Reason for NT coding and notification to HMRC
The NT coding provision is not applied specifically to benefit the bankrupt by increasing his/her income. Instead, where a bankrupt is in PAYE employment, HMRC has to put itself in to the same position as would have been the case if the bankrupt had been self-employed (and not subject to PAYE), where tax would have been due at the date of the bankruptcy order. The NT code is therefore applied by HMRC where bankrupts are in employment, to ensure that the taxation of all individuals is dealt with on an equal basis.
It has been agreed that notification of the bankruptcy order (see paragraph 31.7.62) will cause the local tax office dealing with the bankrupt taxpayer’s affairs to identify where appropriate, cases where the nil tax (NT) code will be applied, the application of the NT coding is not dependent on any additional notification from the official receiver to the tax office.
31.7.67Claiming extra income arising from NT coding
The monies refunded as a result of the application of the NT code are a direct consequence of the making of the bankruptcy order and should therefore be available for the benefit of the bankruptcy estate. Where the NT code is expected to be applied before the end of the tax year, the additional income arising as a result of the application of the NT coding can be included when calculating the bankrupt's surplus income from which contributions can be collected under an IPA. It also possible that the increased income available to the bankrupt as a result of the application of the NT coding may provide sufficient surplus to agree an IPA/IPO, even where the bankrupt does not have sufficient surplus for an IPA/IPO from his/her usual net income. In this instance an IPA could be agreed based solely on the surplus income created by the application of the NT coding to the bankrupt’s salary, ensuring that his/her reasonable domestic needs are taken into consideration in any calculation (see also 31.7.68).
31.7.68Reasonable domestic needs must be considered with regard to NT income
In all cases, the requirements of Section 310(2) [note 5] must still be taken into account when considering whether an IPA is viable to cover the period of the NT tax coding, to ensure that the bankrupt and his/her family are left with sufficient funds for their reasonable domestic needs. It may be that in some circumstances it will not be appropriate to require the bankrupt to consent to an IPA to collect the additional income resulting from the NT coding, if the bankrupt can demonstrate that this would cause him/her to experience financial hardship as he/she will not have sufficient income to meet the reasonable domestic needs of him/her and his/her family even including this income. The IPA which includes the surplus income arising as a result of HMRC applying the NT coding, should be drafted such that when this surplus income is no longer received (either where the bankrupt’s income source changes or at the end of the tax year, see paragraph 31.7.65) the monthly amount payable under the IPA is reduced accordingly. The IPA should state that the NT income will only be collected under the agreement for the period during which the NT coding has effect.
31.7.69Form TNIDIS instruction to agents
(amended February 2012)
Where an IPA has been agreed to collect surplus income arising as a result of the application of an NT coding, and the bankrupt has signed the Tax and National Insurance Disclosure Authority (form TNIDIS), a copy of form TNIDIS can be forwarded to HMRC, PO Box 1970, Liverpool L75 1WX with form IRNTC to request that HMRC forward notice of the NT coding to the official receiver's agents to enable them to commence collection of the NT IPA. The original form TNIDIS should be retained by the official receiver.
In deciding whether an IPA is appropriate in order to collect surplus NT income, consideration should be given to the amount of tax the bankrupt pays each month and the time the local tax office is likely to take to implement the NT coding. In practice, it can take some time to implement the NT code and the bankrupt will then receive the overpayment of tax as a refund at the end of the tax year. Where such a tax refund arises due to delays in adjusting the bankrupt's tax code, it should be claimed by using the bankrupt’s duly completed authority TNIDIS which authorises the payment to the official receiver/trustee of income tax refunds payable for the tax year in which the bankruptcy order was made. The tax refund must not be claimed as after-acquired property.
31.7.70Effect of NT coding on tax credits
HMRC have confirmed that the application of the NT code to a bankrupt's income will not have any impact on a bankrupt's claim for working tax credits. Tax credits will continue to be paid at their existing rate regardless of the application of the NT coding unless the circumstances of the claimant (bankrupt) change (other than the application of the nil tax code). Refer also to Chapter 77 Part 7 and Case Help Manual part Tax Refunds. Further information concerning tax and self assessment can be found at: www.hmrc.gov.uk
Section (i) Income received from spouse/civil partner/partner
31.7.71Income received from spouse/civil partner/partner
It is reasonable to expect that within the household of the bankrupt and his/her family, the income received by a working spouse/civil partner/partner (all referred to as "partner" for the remainder of this section) or a partner who receives income from other independent means, will be used to contribute to the household expenditure in some way, for example by purchasing food, clothing for him/herself and any children, etc. The bankrupt may genuinely not know his/her partner’s income and/or the partner may not be willing to disclose it to the official receiver as they are not personally subject to the proceedings. Legal advice has been received that it is not a proper use of section 366 [note 5] to have a partner privately examined for the purpose of obtaining details of his/her income to establish whether an IPA/IPO may be obtained.
31.7.72Ascertaining partner’s income where bankrupt does not co-operate
Where resistance to the disclosure of the partner's income is encountered, in the absence of any information to the contrary, it is appropriate for the official receiver to assume that the working partner pays for 50% of all household expenditure. This will enable an income payments calculation to be completed to ascertain whether there is any surplus, and the bankrupt’s share of that surplus, against which an IPA/IPO can be sought. It is likely that an assumption of this nature will provoke a response from the bankrupt and/or their partner and if the required information concerning the exact amount of the partner’s income is then received, the official receiver may re-calculate the income and expenditure of the bankrupt taking in to account this new information.
31.7.73IPA/IPO payments to be equal to or less than the bankrupt’s surplus income (amended April 2012)
As with state benefits which supplement earned income, whilst it is acceptable to include the income of the bankrupt's partner as part of the total income received into the household of the bankrupt, it should be noted that an IPA/IPO claim can only be made against the surplus arising from the bankrupt's income. Any calculation of surplus income for the purpose of obtaining an IPA/IPO should work out the surplus available having assessed total income and total expenditure of the bankrupt and his/her household and taking into account the outgoings of both the bankrupt and his/her partner. The extent of any surplus arising should then be apportioned according to the bankrupt’s share of the total income. For assistance in calculating income payments calculations please refer to the Technical Section Income Payments Calculators and Household Expenditure Intranet page.
Section (j) Income from adult children and other adult members of household
31.7.74Income from adult children and other adult members of household
In the same way as it is reasonable to expect that a working partner’s income will be included in covering household expenditure (see Section (i) of this part), it is also reasonable to expect other adults living in the household who have an income, such as adult children or members of the extended family who live all or some of the time with the bankrupt (this could include students), to make some contribution towards the outgoings of the household. Any contribution received from them should be included in income assessed against household expenditure within the IPA/IPO calculation, but it must be noted that an IPA/IPO claim can only be made against the surplus arising from the bankrupt's income.
Section (k) Maintenance payments
31.7.75Maintenance payments received by the bankrupt
The bankrupt may be in receipt of maintenance payments paid by the Child Support Agency (CSA) under the Child Support Act 1991. Any funds paid to him/her in this way fall within the definition of income under the Insolvency Act 1986 Section 310(7) [note 6] and should be included in any calculation for an IPA/IPO. Funds devolve upon the bankrupt when they are paid to him/her by the CSA and therefore should be claimed at that time via an IPA/IPO where this occurs after bankruptcy. Any maintenance payment held as cash in hand or at bank at the date of the bankruptcy order constitutes a vesting asset and should be realised accordingly, this includes arrears of maintenance payments held at the date of bankruptcy. See paragraph 31.7.64 where the arrears are paid after the date of bankruptcy.
31.7.76Arrears of maintenance payments due to the bankrupt Assessments made under the provisions of the
Child Support Act 1991 are made and enforced by the CSA. The parent who requests the assessment does not hold a right to sue the absent parent for payment, and arrears under an assessment are not a “book debt” recoverable by the official receiver’s agents. A parent may ask the CSA to make the assessment and to collect and enforce payments under that assessment. Where the parent is in receipt of state benefits they are required to authorise the CSA to make the assessment and enforce collection. This means any decision on enforcement lies with the CSA, and not the individual or their trustee in bankruptcy. Following recovery of funds by the CSA, any arrears paid to the bankrupt parent post bankruptcy are classed as income so should be included in any calculation for an IPA/IPO, rather than the arrears being claimed as a vested asset. See also paragraph 31.7.69 regarding the interaction between CSA payments and NT coding.
31.7.77Collecting arrears of maintenance payments via an IPA or IPO
If the bankrupt is already subject to an IPA/IPO and receives the monies as a lump sum, the IPA can be varied to collect the lump sum as a one-off payment in addition to the existing monthly payments under the IPA , See paragraph 31.7.175 and Annexes B and C attached to this chapter on varying an IPA or IPO following receipt of a lump sum payment.
If the bankrupt is not currently subject to an IPA/IPO and remains undischarged, then an IPA/IPO can be set up to collect the lump sum, either as a one-off payment, or contributions made on a monthly basis. It must be remembered that in all calculations concerning an IPA/IPO the bankrupt’s reasonable domestic needs must be taken into consideration, and the payment period for an IPA/IPO cannot extend beyond 36 months from the date the agreement or order comes into force. A new IPA cannot be entered into after discharge, and an application for an IPO cannot be made after discharge, although an IPO can be made after discharge where the application was made to court prior to the date of discharge.
Section (l) Student loan income
31.7.78Student loan income
It should be noted that where a bankrupt is in receipt of a student loan this is not income which can be claimed under an IPA/IPO.
31.7.79Further Education (Post 16) Initial Teacher Education Bursary Scheme (Education Act 2002)
The further Education (Post 16) Initial Teacher Education Bursary Scheme was introduced in 2007 by the Further Education Teachers Qualifications (England) Regulations 2007. The scheme pays trainee teachers a “golden hello” payment to train to teach specific subjects , the average amount is around £7,000. These payments have no reference to the ‘student loan’ provisions and are not debts (as the funds are not repayable unless the student receives an overpayment which the institution can recover). Therefore any amount received by bankrupt by way of a bursary under this scheme should be included as income in any IPA/IPO calculation.