This fact sheet covers England & Wales. We also have a version for Scotland if you need it.
Use this fact sheet to:
- get more information about debts to Her Majesty’s Revenue and Customs(HMRC);
- understand what to do if HMRC take recovery action against you;
- deal with business rates, rent and utility arrears, accountants’ bills, equipment leases and supplier debts; and
- find out where to get specialist help and advice.
This fact sheet gives information about business debts that self-employed people commonly have. We explain how you can deal with these debts if you have stopped trading. We do not give information about debts owed by limited companies. If you are still trading then you need to get more advice and information about running your business and dealing with the ongoing debts your business may have. Contact Business Debtline (BDL) on 0800 197 6026.
Debts to HMRC
HM Revenue & Customs (HMRC) are responsible for collecting income tax, National Insurance and value added tax (VAT). HMRC are likely to take further action against you more quickly than some other types of creditors. This may mean that you need to treat a debt to HMRC as a priority. However, you may not need to do this if the types of action they can take do not have serious consequences for you. In the following sections we give more information on the different types of debt that HMRC collect and how they can take action to recover the money you owe. If you are not sure whether to treat a debt to HMRC as a priority, contact us for advice.
When dealing with income tax arrears, you need to consider the following points.
- After completing a tax return, check whether your tax debt is correct. If you think the amount is not correct, contact HMRC to discuss what you think you do owe.
- If you have not sent HMRC a tax return, your income tax arrears will be estimated. You will be sent a ‘determination’. You have no right of appeal against this determination so if you think the figures are wrong, send HMRC your tax return as soon as possible.
- Send in your tax return even if it is late. However, if you send in your return after the deadline, penalties will be added to what you owe. The deadline for sending in your tax return depends upon how you send it in. If you send in your tax return by post, the deadline is usually 31 October each year. If you send in your tax return over the internet, the deadline is usually 31 January each year. Penalties for late tax returns are a complicated area. Contact us for advice.
- HMRC will add interest to your tax debt at a set rate. It is very rare for HMRC to stop adding this interest. This means that the amount you owe can increase quickly.
Outstanding tax returns
If any of your tax returns are still outstanding, HMRC will not usually allow you further time to pay your debt back in instalments.
It is important to try to make an arrangement to pay with HMRC collectors as soon as possible. Collectors are people employed by HMRC to collect debts owed to them. You may need to treat income tax arrears as a priority debt. Make an offer to clear the arrears and use your budget to show what you can afford.
The collector will sometimes accept instalments to clear what you owe. However, this will usually be over a short period, for example between three and six months, depending upon your circumstances. If you need longer than this to pay back what you owe and you have previously had a good payment record, the HMRC Business Payment Support Helpline may agree a longer repayment period with you. Contact them on 0300 200 3835.
Value added tax (VAT)
Outstanding VAT returns
If any of your VAT returns are still outstanding, HMRC will not usually allow you further time to pay your debt back in instalments.
VAT is a tax that is charged on most goods and services that certain businesses provide. You should have been registered to pay VAT if your annual turnover was above a certain amount. The amount you should have paid will be the VAT on your sales minus the VAT on purchases for goods and services you bought for your business.
If your business was VAT registered, contact HMRC to de-register for VAT if you have not already done this. This will help to make sure they have worked out how much you owe properly.
- Make sure all of your VAT returns have been sent to HMRC. If your VAT bill has been assessed and you disagree with the amount claimed, you can ask for a review within 30 days. If you still disagree with the decision, you can appeal to a VAT tribunal. If you are considering making an appeal, contact us for advice.
- After you have stopped trading, it is usually possible to come to a payment arrangement with HMRC over a short period of time once you are no longer VAT registered. However, penalties and interest for late payment will be added to your VAT bill.
- You may need to treat VAT arrears as a priority debt. Use your budget to help you work out what offer of payment to make. Contact us for advice.
- If your budget shows that you are offering all that you can afford, HMRC will usually allow you to pay the VAT arrears over a maximum of 12 months. Call the HMRC Business Payment Support Helpline on 0300 200 3835. However, if you do not send HMRC a budget, they may ask you to clear your VAT arrears within 3 months or less.
National Insurance contributions are dealt with by the HMRC National Insurance Contributions Office (NICO). There are different types, or ‘classes’, of National Insurance contributions.
Class 1 contributions
Class 1 contributions are paid by employees unless your earnings are below a certain limit.
Class 2 contributions
Class 2 contributions are paid by self-employed people as a weekly flat rate unless your earnings are below a certain limit. If your earnings were below this limit and you did not ask HMRC for exemption from paying class 2 contributions, the amount you owe may be wrong. Contact us for advice. Arrears of class 2 contributions are collected by the ‘National Insurance Contributions Office’ at HMRC.
Class 4 contributions
Class 4 contributions are paid by self-employed people in addition to class 2 contributions, where your earnings are above the personal tax allowance for the year. The amount changes every year. Contact us for advice.
It is important to tell HMRC (NICO) when you stopped being self-employed.
Paying class 2 contributions late
It is a criminal offence not to have paid class 2 contributions on time and HMRC can ask the magistrates' court to fine you for non-payment. In practice, this is unlikely. If HMRC threaten to do this, contact us for advice.
National Insurance arrears may need to be treated as a priority debt. Use your budget sheet to work out an offer of payment that you can afford. Contact us for advice.
Further action HMRC can take
HMRC can try to recover the money you owe in a number of different ways.
Changes to your tax code
For some debts to HMRC, if you are currently working for an employer either full or part-time, HMRC may try to recover the money by changing your tax code. This allows them to recover the debt from your wages before you get them. If you think HMRC are trying to do this for a debt you owe, contact us for advice.
Changes to the law on bailiffs
On 6 April 2014, the law on bailiffs changed. The information in this fact sheet is based on our understanding of the new rules. Some bailiffs may interpret the new rules differently. It is not yet clear how the new rules will be applied in practice. If you are unsure whether a bailiffs actions are legal, contact us for advice.
Bailiffs are also commonly known as enforcement agents. In this fact sheet we use the term bailiff.
The ‘bailiff’ will be a collector appointed by HMRC Commissioners. HMRC can use bailiffs to recover debts without getting a court order first. This is known as 'taking control of goods'. If they gain entry to your home, the bailiff will usually list items and ask you to sign a ‘controlled goods agreement’. This allows you to keep use of the goods listed whilst you make payments by instalments. If you do not pay, the goods listed on the controlled goods agreement can be removed. HMRC bailiffs may also remove your goods straight away or lock them up on your premises until you pay what you owe. You should try to agree affordable payments by instalments.
There are some goods which cannot be taken such as basic household items and goods owned by other people. HMRC can take goods used in your business, if you are still self-employed. Contact us for advice.
Bailiffs' entry rights
You do not have to let the bailiffs into your home but they can come in through open doors. If you refuse entry to an HMRC bailiff, they may apply for a warrant to break into your home, but this is unlikely to happen very often. If you park your vehicle on a public road, HMRC bailiffs can use force to get into the vehicle and take control of it. If you park your vehicle on your drive, the bailiffs may clamp or remove it. If you can, keep your vehicle locked in a garage.
Direct deductions from bank accounts
If you owe HMRC at least £1,000 they can ask your bank if there is any money in your account to pay this debt. They will normally be able to do this 30 days after you have the letter from HMRC telling you how much you owe. HMRC can do this without going to court first. In most cases if you account is less than £5,000 in credit, HMRC cannot take any money.
The minimum amount of £1,000 that must be owed to HMRC can be made up of any type of tax including income tax and VAT.
If you don’t agree that HMRC can take this action, for example the debt has been paid, you can object to HMRC. Contact us for advice.
HMRC can ask for money to be taken from a joint account. Only money in the account belonging to the person who owes the debt can be taken. However, HMRC will assume balances in joint accounts are split equally. For example, if the account is in two names, and only one person owes the debt, HMRC will say 50% of the money in the account can be taken.
County court action
HMRC may make a claim through the County Court to get a county court judgment (CCJ) against you. This may be done if bailiff action is not successful. County court action is most commonly used to recover income tax and National Insurance arrears. A CCJ will be recorded on your credit reference file for six years and can affect your ability to get further credit.
- When county court action is taken against you, you will get a ‘claim form’. This gives details about the debt and tells you how much the creditor says you owe them.
- You can complete the ‘admission’ form if you admit the debt and want to make an offer to pay the debt in instalments.
- If you want to dispute all or part of the debt, contact us for advice.
The County Court should consider your circumstances and your income and outgoings before making a decision about how the debt should be paid back. The final decision about how much you should pay back each month is taken by the court, even if the collector wants a higher amount.
If HMRC applied for a CCJ against you on or after 1 October 2012, they can apply to secure the debt against any property you own, even if you have not missed payments on the CCJ. If HMRC applied for a CCJ against you before 1 October 2012, the rules are different. Contact us for advice. See our Charging orders fact sheet for more information.
If you miss payments on a CCJ, HMRC can take other types of action against you through the County Court, which could include:
- taking regular deductions from your wages if you are working, called an ‘attachment of earnings order’;
- freezing money in your bank account, called a ‘third party debt order’; and
- applying to court for a ‘judgment summons’.
For more information about different kinds of enforcement, see our Replying to a County Court claim fact sheet.
The court can issue a ‘judgment summons’ for you to go to court and explain why you have not paid. If HMRC do this, you can be sent to prison if you have:
- had the money to pay the amount of the judgment summons since the CCJ was made; and
- wilfully neglected or refused to pay as the court ordered.
In practice, HMRC do not use this procedure very often.
Magistrates’ court action
If you owe less than £2,000 on income tax or National Insurance, in some situations HMRC could recover the debt through the magistrates’ court. The process is called ‘summary proceedings’. The collector has 12 months to start summary proceedings once the debt is due.
Although this power exists, it is not currently being used by HMRC.
Magistrates' court bailiffs
If a debt has previously been referred to the magistrates' court and you have not paid as the court ordered, magistrates’ court bailiffs could be used to collect the debt. Magistrates’ court bailiffs can force entry to your home to remove goods, but this should only be done as a last resort and when it is reasonable. Contact us for advice.
To find out more about magistrates’ court action, see our Magistrates’ court fines fact sheet.
If you owe £5,000 or more, HMRC could apply to make you bankrupt. Bankruptcy means that valuable things you own (your ‘assets’) could be sold to help pay your debts. You would usually receive a ‘statutory demand’ before being made bankrupt. This is a legal document which shows what HMRC claim you owe.
Bankruptcy should be a last resort for HMRC after other methods of recovering the debt have been attempted. It is very important to let the collector know if you have very little income or no assets, particularly if your home is worth less than any mortgage or secured loans on it. If the collector can see that you do not have any assets, they may decide not to make you bankrupt. For more information, see our Bankruptcy fact sheet and Statutory demands fact sheet.
How HMRC should behave
If you have not already sent your tax returns to HMRC, it is very important that you do this. This will allow HMRC to calculate your debt accurately. You may find that you owe less than you first thought.
HMRC have a service commitment laid out in a Charter (called the ‘HMRC Charter’) which includes the following commitments.
HMRC will act ‘fairly and impartially’ by:
- treating your affairs in strict confidence within the law.
HMRC will ‘communicate effectively’ by:
- providing clear and simple guidance; and
- giving accurate and complete information.
HMRC will provide ‘good quality service’ by:
- handling your affairs promptly and accurately;
- being accessible:
- keeping your costs to a minimum;
- helping customers with special needs; and
- being courteous and professional.
Complaining about HMRC
You may want to complain if you have been refused time to pay your arrears and you feel that this is unreasonable in view of your circumstances.
- You should first contact the HMRC office that has been dealing with your case. If you are not happy with the response, your complaint will usually be passed to a ‘complaints handler’. HMRC accept complaints by telephone and in writing.
- If you are still not happy with the response, you can ask HMRC to look at your case again. They will usually ask a different complaints handler to consider your case.
- After going through these steps, if you are still not happy you can contact the Adjudicator’s Office. See Useful contacts at the end of this fact sheet. The adjudicator is not part of HMRC and they can act as an impartial referee in unresolved complaints.
- If you are not happy with a decision that HMRC has made, such as the amount of tax you owe or the charges they have asked you to pay, you may need to follow the review and appeals process instead of complaining. Contact us for advice.
Business rates are a tax you have to pay to the council. If you have stopped trading, tell the council straight away. You may still be responsible for paying business rates if you are still leasing premises, even if they are empty. However, there may be discounts you can claim.
- You may be entitled to ‘relief’ from business rates in certain circumstances. Contact us for advice.
- Check the bill to make sure it has been calculated correctly. Contact us for advice.
- Business rates are a priority debt. Use your budget to work out an offer of payment that you can afford.
Remitting business rates
The council has the power to remit or ‘write off’ all or part of your business rates arrears. In practice, local authorities do not agree to this very often. However, it may be worthwhile making an application if you feel that you can show that you are in exceptional circumstances.
In order to remit business rates, the council must be satisfied that:
- you would suffer hardship if they did not remit the business rates: and
- it is reasonable for them to remit your business rates, taking into account the interests of local people.
Exceptional circumstances may be where:
- your business is essential to the local community. This may include a rural post office, a nursery and day care facilities where there are no other similar services in the area; or
- your business has failed, you are left with arrears on business rates and your personal circumstances mean you are unable to make an offer of payment. If you now receive only benefit income and this is unlikely to change in the future, your circumstances are more likely to be considered exceptional. For example, this could apply if you are suffering from long-term ill health.
You need to write to the council asking for your business rates to be remitted under section 49 Local Government Finance Act 1988. You also have to:
- show how you would suffer hardship;
- show what steps have been taken to make the business work; and
- provide details of your budget and any assets you have.
Treat business rates arrears as a priority debt. This is important because the council has a range of powers to recover business rates arrears. They should send you a reminder notice when you fall behind on your payments. If you still do not pay after reminders have been sent, the council can ask the magistrates’ court to make a liability order. This allows the council to try different ways of collecting the debt from you.
Unlike council tax, you cannot have money taken out of your benefits directly to pay back business rates arrears.
The council can send bailiffs to business premises or your home. The procedure is almost exactly the same as for council tax. They cannot take protected goods such as basic household items. The main difference is that they can take tools of the trade. For more information, see our Council tax arrears fact sheet.
Bailiffs' entry rights
Bailiffs cannot force their way in if they have not gained entry peacefully before. If the bailiffs have not yet been into your home, you can choose not to let them in. Contact us for advice.
If the bailiffs have not yet taken control of any vehicles you own, keep them safe by locking them in a garage or parking them well away from your property. However, if you do park your vehicle away from your property and the bailiffs find it, they may clamp it or use force to get into it and take it away.
Contact the bailiffs and the council and try to negotiate an offer of payment that you can afford. Start paying immediately.
If the council has tried to use bailiffs and you are still in arrears, they can ask for a hearing in the magistrates’ court called a ‘means enquiry’. The court should not send you to prison unless they can show that you are guilty of:
- wilful refusal (you have deliberately refused to pay); or
- culpable neglect (you could afford to pay but did not).
The court can order all or part of your business rates arrears to be written off in exceptional circumstances, but are more likely to tell you to pay the arrears off in weekly instalments. You must go the hearing and explain why you have not been able to pay. Take your budget.
If you do not pay the amount ordered, you will usually have to go to court again and may be sent to prison. It is very important to get advice before the hearing. Contact us for advice.
Get further help
If you have not been able to get help before the hearing you can ask to speak to the duty solicitor in the court on the day.
Gas and electricity arrears
If you have debts from your business premises for gas and electricity, suppliers have the same powers of recovery for each. A debt from your business premises can be transferred to your home account if the accounts are in the same name and provided by the same supplier. In this situation, you could be disconnected at home for arrears from your business premises. If this is the case, you must treat electricity and gas arrears as priority debts. Make an offer of payment to clear the arrears as well as paying your current bill.
You can no longer be disconnected at home for water rates arrears. This applies to your ongoing water rates bill and also a water debt for any previous property you lived in or traded from. The water company may make a claim through the County Court to get a county court judgment (CCJ) against you. This is a court order which states what you owe and how it should be repaid. Therefore it is a good idea to build your ongoing water rates into your budget. Make an offer of payment you can afford on the arrears on the same basis as your credit debts.
Old business suppliers
If you have debts to businesses that used to supply goods and services to you, they could take further action against you to recover their money.
Debt collection agencies
Sometimes old suppliers will use a ‘debt collection agency’ to try to collect their money. Don’t worry. A debt collection agency has no greater powers than the organisation you owe the money to. They are not bailiffs and have no right to come into your home.
County court action
Old suppliers may make a claim through the County Court to get a county court judgment (CCJ) against you. The supplier should send you a letter before they start court action telling you how to pay and how to contact them to discuss what repayment options you might have. The county court process is the same as described earlier for debts to HM Revenue & Customs. See the earlier section County court action under the heading Debts to HMRC.
Debts to suppliers are not usually regulated by the Consumer Credit Act 1974. If this is the case and you do not keep to the payments the court has ordered on a CCJ, bailiffs called High Court Enforcement Officers could be used to recover the debt. If High Court Enforcement Officers have not been into your home before, do not let them in. This is because they should not force their way into your home unless they have been in peacefully before and taken control of your goods properly. See our High Court enforcement fact sheet for more information.
Old business suppliers cannot use a 'Judgment summons' if they are successful in taking county court action against you. Therefore, you cannot be sent to prison for not paying a debt to an old supplier, even if you have a CCJ against you.
If you owe £5,000 or more, your old supplier could apply to make you bankrupt. The process used is similar to that for debts to HMRC. See the earlier section Bankruptcy under the heading Further action HMRC can take for more information.
Business rent arrears
You may have had a lease for business premises. When you cease trading you may still be liable for ongoing rent and any arrears even if you have given up the lease and returned the keys to the landlord.
If your tenancy runs from month to month, then you must give the correct period of notice before leaving. However your liability usually ends when your tenancy finishes. Check the terms of your tenancy agreement.
- If your lease is over a period of years then you may be liable for the rent until the lease expires or a new tenant is found either by you or the landlord. Check the terms of your lease agreement.
- If your landlord evicts you from the business premises the lease will end and you will not be liable for ongoing rent and business rates.
- If you are liable for the ongoing rent, you may be able to sublet or ‘assign’ the premises. Check your agreement. The landlord should not normally ‘unreasonably refuse’ to let you do this.
- Ask the landlord to let you surrender the lease. If the landlord accepts surrender of the lease they will be liable for business rates while the property is empty. Therefore they are unlikely to agree unless they can easily find another tenant.
- A landlord for a business tenancy can send bailiffs to recover rent arrears without a court order. However they can only usually call at the rented business premises to remove your stock and equipment. Therefore if the premises are empty, bailiffs cannot usually come to your home and remove personal belongings. If your landlord is threatening to use bailiffs for rent arrears, contact us for advice.
- After you have stopped trading you can treat the rent as a non-priority debt and negotiate payments you can afford with the landlord.
You may have had an agreement with a company to lease equipment for your business. Check the agreement to see whether you have the right to keep the equipment at the end of the lease. You may have to pay for the equipment until the lease runs out whether you return the equipment or not. If you want to keep the equipment you have leased but cannot afford the payments, contact us for advice.
Selling leased equipment
It is a criminal offence to sell leased equipment without the consent of the company. Check with the leasing company if the debt will be reduced if you return the equipment. If you no longer need the equipment because you have ceased trading, you can treat this as a non-priority debt and negotiate payments you can afford with the company.
If you have an accountant who usually deals with your tax returns, you may have a problem if you are not up to date with their bill. Sometimes accountants refuse to complete tax returns or give you back your books if they have not been paid. This can cause problems with HMRC if they have sent you an estimated tax bill that is too high.
- If you cannot get your books back, try to give HMRC a summary of your trading figures from any papers you have.
- Tell HMRC why you have no books. Ask them to accept your estimate even if you have no papers to prove your figures.
- Try to negotiate with your accountant to give your books back. They may agree if they can see you are in no position to make any sort of payment to them, or you may be able to make an agreement for a part payment instead.
To get personal advice on how to deal with your debts, use our Digital Advice Tool. Tell us about your situation and your debts, and our tool will advise you on the solutions suitable for you. Visit nationaldebtline.org and click ‘Get started’ in the ‘Find debt solutions’ box.
Adjudicator’s Office Phone: 0300 057 1111 www.adjudicatorsoffice.gov.uk
Business Debtline Phone: 0800 197 6026 They are open: Monday to Friday 9:00am to 8:00pm www.businessdebtline.org
Taxaid If you need specialist advice on tax you can ring Taxaid. Phone: 0345 120 3779 www.taxaid.org.uk
Other fact sheets that may help you
Bankruptcy fact sheet
Charging orders fact sheet
Council tax arrears fact sheet
High Court enforcement fact sheet
Magistrates’ court fines fact sheet
Replying to a County Court claim fact sheet
Statutory demands fact sheet