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HMRC internal manual

Self Assessment Manual

From
HM Revenue & Customs
Updated
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Records: bankruptcy: bankruptcy - taxpayer records

General

Taxpayers who are bankrupt will, in the majority of cases, have two UTRs. One for the period up to the date of bankruptcy and a second for the SA record set up to deal with the period after the date of bankruptcy.

For the year of bankruptcy all income is all declared on the tax return issued from the pre-bankruptcy SA record. A tax return for the year of bankruptcy should not be issued from the post-bankruptcy SA record. However, tax returns for the years following the year of bankruptcy should be issued from the post-bankruptcy record.

Liability for the year of bankruptcy on a trade source existing at the date of the bankruptcy order will form the bankruptcy debt for that year, whether that trade

  • Ceases at the date of the bankruptcy order

Or

  • Continues beyond that date but ceases before the following 5 April

Or

  • Continues beyond the following 5 April

Otherwise, where, after the date of the bankruptcy order, the taxpayer continues to receive income and / or gains that fulfil SA criteria, a new SA record should be set up as follows

  • In all PAYE primary source cases where

    • There is an SA record linked to a PAYE record

    Or

    • Where there is not a linked SA record

    And, exceptionally

    • The taxpayer has liability for the year of bankruptcy which is not to be included in the liability up to the date of bankruptcy
  • In trading main source cases provided either

    • A trade at the date of the bankruptcy order continues beyond 5 April following the date of the order

    Or

    • A new trade starts after the date of the bankruptcy order

Note: After bankruptcy, if the taxpayer does not require a post-bankruptcy record immediately but does so at some later date, you must still use SA function SET UP POST BY/VA INDIVIDUAL. This will ensure that the NINO will be transferred across to the new SA record.

Approach in all cases

It is necessary to remember the sensitive nature of these cases and to ensure all is done correctly for the taxpayer.

The closing of the pre-bankruptcy SA record and the setting up of the post-bankruptcy record must be dealt with correctly following SAM106032 and SAM106033. Failure to do so causes inconsistencies throughout the various systems.

For the year of bankruptcy, the pre-bankruptcy SA record will be used for the issue and capture of the manual tax return. This return cannot be completed online. The paper copy must be completed and captured. The full year’s income should be declared on this return. The tax returns for the years following the year of bankruptcy will be issued from the post-bankruptcy SA record.

The issue of the tax return from the pre-bankruptcy record must be issued manually to the taxpayer. Full details of this are covered at SAM106031 onwards.

Employee bankrupt

In PAYE only cases, NPS can deal with cases where there is either an underpayment, or overpayment, arising for the year of bankruptcy. However, NPS cannot deal with cases if a PAYE liability arises from the date of bankruptcy which is the debt of the individual, and is not attributed to the operation of code NT. An SA record will need to be set up to deal with the year of bankruptcy, and also a post-bankruptcy record set up to deal with the liability arising from the date of bankruptcy. For further information see subject ‘Records: bankruptcy: PAYE source with unlinked/dormant or no SA record (Action Guide)’ (SAM106033).

In live SA PAYE cases the existing SA record is used to deal with liability falling into the year of bankruptcy. A new post-bankruptcy SA record is set up on dealing with the years following the year of bankruptcy. It is very important that SAM106032 and SAM106033 are followed correctly when closing the pre-bankruptcy SA record and setting up the post-bankruptcy SA record. Failure to do so causes problems with information not flowing correctly through frameworks and as a consequence taxpayer records are incorrect.

The new SA post-bankruptcy record is used to deal with

  • Any liability in the year of bankruptcy which the taxpayer is liable to pay

Note: As in non-SA PAYE cases it will be exceptional for the taxpayer to be responsible for paying liability in the year of bankruptcy. But it can happen where, in the period from the date of the bankruptcy order (or award of sequestration) to the following 5 April, the taxpayer starts either

* A new employment and an underpayment arises on that source

Or  


* Self employment and that source gives rise to taxable profits
  • Liability for years after the year of bankruptcy

When function SET UP POST BY / VA INDIVIDUAL is used to create a new SA record for the period following the bankruptcy / voluntary arrangement period, the UTR of the original SA record is automatically stored on the new SA record. This is to assist in tracing the original SA record if, at a later date, a full history of the taxpayer’s activities is required. The UTR of the new SA record is also automatically stored on the original SA record

Notes:

1. You must not use function SET UP POST BY/VA.INDIVIDUAL RECORD until TBS shows the existing record is dormant. This will normally be an overnight process following the setting of the Final Return Year signal on the existing record
   
2. You should use SA function SET UP POST BY/VA INDIVIDUAL to set up a new SA record following bankruptcy even if the date of bankruptcy is some years earlier
3. If the bankruptcy order is annulled after you have noted the pre-bankruptcy record and created a post-bankruptcy record to put the position back correctly, you must close the post-bankruptcy record down correctly and wait for TBS to be updated overnight before you reactivate the pre-bankruptcy record to ensure the NINO transfer back to the pre-bankruptcy record