In the UK a self assessment system is in operation for income tax and capital gains tax, and for Class 4 NICs for the self employed (see paragraph 77.41) and student loan repayments (where applicable) for the self employed individual.
HMRC usually send out self assessment tax returns (form SA 100) in April of each year. The taxpayer has the option of asking HMRC to calculate the tax due, but must submit the completed return by 30 September following the end of the tax year, e.g. the return for the tax year ending 05 April 2006 must be submitted by 30 September 2006. The tax return must also be submitted by this date if the taxpayer is an employee who wishes to have an underpayment of tax collected in a later year through PAYE (up to a maximum amount of £2000) instead of paying it as a lump sum by the 31 January filing date.There are automatic penalties for late returns, see also paragraph 77.34.
If the taxpayer is calculating the tax due himself/herself, the return must be submitted by 31 January following the end of the tax year, e.g. the return for the tax year ending 05 April 2006 must be submitted by 31 January 2007.
The basic return comprises 10 pages supplemented with additional pages according to the tax payer's circumstances. The additional pages cover employment, share schemes, self employment, partnership, land and property, foreign income, trusts and estates, capital gains and non residence. There is also a shorter tax return for people who, based on the information in their last tax return, have simple tax affairs.
HMRC does not expect either official receivers or insolvency practitioners to participate in the completion of bankrupts’ and discharged bankrupts' self assessment returns. Self assessment returns will be issued to the bankrupt post bankruptcy who must continue to complete his/her own returns: it is not the responsibility of the official receiver to complete such returns
Most of the tax due to HMRC is collected by those paying income to others, i.e. by the PAYE system, by banks/ building societies etc deducting interest from interest payments and under the tax credit system for paying company dividends.
Any other tax remaining to be paid is due as follows. Payments on account are made on 31 January in the tax year and 31 July following, with the balance due or repayable settled on the following 31 January. Payments on account are in effect a form of installment payment, and will normally be equal to half of the net income tax liability, and for the self employed Class 4 national insurance contributions and any student loan payments of the previous tax year.
Payment on account does not need to be made if the amount of income tax etc due to be paid directly to HMRC was less than £500, or if more than 80% of the previous year's tax was covered by PAYE and/or deductions at source. Any tax outstanding in such circumstances will either be collected as a single payment on 31 January, or through the PAYE system by amending an individual’s tax coding.
HMRC will periodically issue statements of account (form SA 300) to tax payers showing how much tax is owing or has been overpaid.
The taxpayer must keep all records relevant to their self assessment return for 22 months from the end of the tax year, unless they are in business or let property when the records must be kept for 5 years and 10 months from the end of the tax year. If HMRC has commenced a formal enquiry into a return, the records must be kept until the enquiry is completed even if the other time limits for keeping the records have expired.
Documents and accounting records produced to the official receiver during interview may relate to tax returns previously completed by a bankrupt. It is the view of The Insolvency Service and HMRC that in bankruptcy cases the requirement to preserve records remains with the bankrupt and does not fall on the trustee. To avoid the need for records to be returned to the bankrupt to enable this requirement to be met, notification is sent to HMRC by the official receiver when the records are to be destroyed [note 1] (see paragraph 77.33A).
To ease the burden on the official receiver as regards the preservation of records, The Insolvency Service has agreed special provisions with HMRC for the early disposal of records, subject to certain formalities. Notification [note 1] should be sent to the Inspector of Taxes dealing with the insolvent’s affairs. Where details of the relevant Inspector is not known the letter should be sent to the local inspector by reference to the insolvent’s trading address or residential address where the bankrupt has not traded. The same procedure should be followed for the records of companies and partnerships in liquidation.
The notification should inform HMRC that they have three months to respond otherwise the records will be destroyed. The second page of this form shows several options and should be completed and returned by HMRC if they require the records to be kept. The official receiver's records should then be noted with any response received, and any completed notification form [note 1] should be placed on the office file. If no response to this notice is received within the three month period given, the official receiver has authority to destroy the books and papers.
Once the above checks have been carried out, the books and papers should be dealt with accordingly, i.e. preserved or destroyed. The BPOGD should not be sent to the Insolvency Claims Handling Unit as this unit only deals with insolvency claims.
If the bankrupt requires sight of the records to complete a Self Assessment return, he/she (or his/her representative) should be allowed access to the records. See also Chapter 47 Part 4 - Disclosure of information (including inspection and production of records.)
An automatic penalty of £100 is charged if the self assessment return is not submitted by 01 February (or the filing date agreed if later), plus an additional penalty not exceeding £60 a day if HMRC have received a direction from the Commissioners to charge a daily penalty. HMRC will not apply for the daily penalty unless they believe a substantial amount of tax is owing.
If the daily penalty has not been imposed another £100 is charged if the return is not submitted by 31 July (or 6 months from the filing date if later). There is a further penalty if the return is not made by next 31 January (or one year from the filing date if later) of an amount equal to the tax that would have been payable under the return.
The late return fixed penalties cannot exceed the amount for the year that is outstanding at the return date. If a repayment is due to the tax payer from HMRC then the penalty can not be applied and if paid should be refunded
After the date of the bankruptcy order HMRC will not pursue the levying of any (further) penalties or the notification of any (further) determinations (similar to the estimated assessments) in respect of a bankrupt taxpayer’s affairs. Generally the position in account between the taxpayer and HMRC as at the date of the bankruptcy order will be as shown on the Statement of Account which the official receiver will receive from HMRC. If it is necessary to amend details of the claim HMRC will notify the official receiver separately.
HMRC bases its claim on the tax due for the whole year in which a bankruptcy order is made, in addition to any arrears, but only in cases where there has not been a change of source of income to the taxpayer. The bankrupt is liable to tax on his/her assessable income and profits from the end of the tax year in which the bankruptcy order was made unless there has been a change in the bankrupt’s source of income.
‘Source’ is an expression used by HMRC to indicate from where a taxpayer has obtained or is obtaining taxable income. For example, if a taxpayer was engaged as a window cleaner for the whole of the tax year in which the bankruptcy order was made against him, there would not be a change of source which would affect the basis of the bankrupt’s liability to tax. But if, after the bankruptcy order and in the same tax year, the bankrupt were to obtain (alternative) work as a carpet cleaner or were to take direct employment (and thus become subject to the collection of income tax under the PAYE scheme), either of these events would be a change of source which would cause HMRC to hold the taxpayer (personally) liable for the tax arising from this income in the period from the date of the bankruptcy order or the date of the change, whichever is the later, until the end of the tax year. The tax arising for this period would not be a provable debt in the bankruptcy but would constitute a post bankruptcy debt for collection by HMRC in the usual way.
In assessing the amount due for the post change of source period of the tax year, HMRC will apportion the taxpayer’s allowances based on the date the change of source occurred. A change of source may reduce the level of HMRC's claim in the bankruptcy as it will only cover part of the tax year as opposed to the full tax year. A change of source might also lead to the taxpayer being given a new record on HMRC's computer system at an earlier time which will reduce the possibility that documents will be sent to the official receiver in error.
As a change of source will lead to the collection of tax, the bankrupt’s NT code (see paragraph 77.23) will come to an end at an earlier time which will, in turn, affect the level at which an income payments agreement or income payments order might be obtained.
For the purposes of HMRC’s claim and for Self Assessment, employed bankrupt taxpayers are treated in the same way as self employed bankrupt taxpayers, including as regards changes of source (see paragraph 77.35). Prior to the time of the bankruptcy, such individuals might have been outside the Self Assessment regime (as their tax affairs were contained within the PAYE system). If the employees have not been part of the Self Assessment regime they will be added to the regime from 6 April before the date of the bankruptcy order so that a Self Assessment return can be obtained for the whole of that tax year. In such circumstances, the taxpayer’s allowances might or might not be apportioned and the taxpayer might or might not also receive a new record on the Inland Revenue’s computer system.
Where an individual raises a query with the official receiver about his/her tax status, he/she should be referred to HMRC for an explanation of how his/her tax affairs have been calculated.
Self assessment returns will be issued to the bankrupt post bankruptcy and the bankrupt must continue to complete his/her own returns. It is not the responsibility of the official receiver to do this.
At the date of the order, self assessment returns which relate to the period before the bankruptcy may be due/ outstanding. Similarly, a return may become outstanding which relates to periods both before and after the bankruptcy order. The bankrupt may be unwilling to submit a return which relates to either of these periods because the information will only be used to formulate a claim in the bankruptcy, but it may be beneficial for both the official receiver and HMRC for the bankrupt to complete and submit any such outstanding returns as this will enable HMRC’s claim to be submitted more quickly. Other than by the giving of access to accounting information, official receivers should not become involved in this process.
The statements of account (see paragraph 77.32) issued by HMRC will be sent to the taxpayer in respect of post bankruptcy taxation and one statement of account will be sent to the official receiver to inform of the up to date position as at the date of the bankruptcy order (the pay slip which will automatically accompany the statement should be ignored). Thereafter, statements of account will only be sent to the official receiver on request.
If official receivers receive self assessment returns for completion in respect of the affairs of a bankrupt (in respect of tax years before or after the date of the bankruptcy order), or statements of account other than in the circumstances described above, the documents should be returned to the issuing tax office with a short note stating that they have been sent to the official receiver in error and a request should be made that the tax office consults its internal guidance on the correct procedure. If the official receiver receives a PAYE coding notice or Self Assessment tax calculation relating to a bankrupt, it should be returned to HMRC at the NI & PAYE Services address at Appendix A of the Partnership Agreement.
The trustee may be in receipt of income derived from the bankrupt’s assets after the date of the bankruptcy order, for example, royalties, rents or the profits of a trade. As the asset from which the income is derived vests in the trustee, HMRC requires the trustee to complete a return of the income and for the income to be assessed in the name of the trustee. Insolvency Rules 1986 Rule 6.224, dealing with the priority in which the expenses of the bankruptcy are payable, makes specific reference to capital gains tax on post-bankruptcy chargeable gains but does not refer to income tax on post-bankruptcy income. HMRC may allow the trustee’s remuneration to be paid in priority to tax on income but this should be confirmed in respect of each bankruptcy. It is common practice for the HMRC in assessments raised in the name of the trustee to give effect to personal reliefs which would be available to the bankrupt under the Income and Corporation Taxes Act 1988 as if the income assessed in the name of the trustee was the income of the bankrupt.
Official receivers should not hesitate to close cases in the usual way despite a (final) claim from the HMRC not having been received. When such a claim is lodged, it should be accepted and handled in the usual way. Further, it is not expected HMRC will seek to object to the granting of the official receiver’s release as trustee of a bankrupt’s estate on the grounds that it has not yet been able to submit a claim in the proceedings.