Business ​Debt and Insolvency, and Tax

Business ​Debt and Insolvency, and Tax

Using debt settlement to clear income tax debt, plus VAT and insolvency and bad debt relief.

By Marcia Smith

Using debt settlement to clear income tax debt

An Individual Voluntary Arrangements (IVA) or debt settlement is usually one of the last resorts for those with unmanageable debt. It’s a quick and relatively straightforward way to settle all of your debts at once and make a fresh start.

If you’re considering an IVA as a means of clearing income tax debt with HMRC, this is possible. To do this, HMRC have to be satisfied that this is the right course of action, the debt settlement agreed on is fair, and that you have the means to pay any future debts on time.

It’s not without its disadvantages, however, most notably the negative effect it will have on your credit rating.

What happens to VAT upon business insolvency?

In the case of business insolvency, your affairs will be taken over by an insolvency practitioner. This person will be in charge of communicating with HMRC. They’ll cancel your VAT registration and organize submission of VAT returns and payments on your business’ behalf. VAT will be payable up to the day before insolvency. The final tax return will be posted to you on paper; it can’t be completed via your online account.

Voluntary arrangements can also be made, whereby you and your insolvency practitioner draw up a proposal and voluntarily pay VAT up to the day before the voluntary arrangement.

What is bad debt relief with respect to VAT?

If a company supplies goods or services that are invoiced, and this invoice has yet to be settled, the company in question can claim relief on the VAT incurred on these goods or services. In other words, it means that they can be excused from having to include this VAT on their annual VAT return. This is referred to as ‘bad debt relief.’

A full rundown of this relief and the terms and conditions for eligibility are available on GOV.UK.