EM6230 - Contract settlements: expected offer: means - bankruptcy

The guidance about contract settlements at EM6000+ only relates to direct tax. You must never include VAT or VAT penalties in a contract settlement.

A creditor or group of creditors may start bankruptcy proceedings against a debtor as the only means of forcing them to pay their debts. The petition may however be rescinded as soon as the debts are paid.

If you become aware that bankruptcy proceedings are imminent in relation to your taxpayer, you should consider making jeopardy amendments, see EM1953.

If a taxpayer is subject to, or has voluntarily commenced, bankruptcy proceedings, this does not necessarily mean that they are unable to settle their liabilities to HMRC. Once a court has issued a bankruptcy order, a trustee in bankruptcy will be responsible for management of the bankruptcy estate. This can be either an Official Receiver or an insolvency practitioner. The trustee will tell the creditors, including HMRC, how much money (if any) will be shared out in the bankruptcy.

Remember that bankruptcy proceedings against a taxpayer do not necessarily mean that they are insolvent. A genuinely insolvent taxpayer will often lose all interest in their tax liabilities and do little or nothing to assist you or the trustee in bankruptcy to determine their outstanding liabilities.

You should not abandon an enquiry just because bankruptcy proceedings have commenced. You should however endeavour to conclude the enquiry as quickly as possible. How much time you should spend on the case subsequently will depend on the collection prospects.

In all cases you must contact the trustee as quickly as possible to help determine the taxpayer’s outstanding liabilities and collection prospects.

  • Interest under the Taxes Acts will cease to run from the date of the bankruptcy.
  • A taxpayer who is bankrupt is unlikely to have the means to pay the full amount of the tax that is due, see EM6238.
  • A decision whether or not to claim any penalties will ultimately depend on the collection prospects, see EM5213.

Once bankruptcy proceedings have commenced you should only consider accepting an offer if it is based on the amount which you could reasonably expect to receive if the bankruptcy ran its course.

Otherwise you should

  • settle the case by the formal route
  • give Debt Management and Banking a report of all the information you have about the taxpayer’s income, expenditure, assets and liabilities and include a completed SEES form MS134
  • explain the situation to the taxpayer and agent accordingly.

HMRC have no preference over other creditors and in discussions with the trustee. You must not attempt to gain any preference.