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HMRC internal manual

Self Assessment Manual

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HM Revenue & Customs
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Returns: individuals returns: bankruptcy cases

For the year that an approved Individual Voluntary Arrangement (VA) or Bankruptcy (BY) (Scotland Award of Sequestration) Order is made the taxpayer is issued with a return manually. The return is prominently noted on issue ‘BY Year’.

New SA record required

Where the taxpayer continues to receive income and/or gains that fulfil SA criteria after the date of the bankruptcy order, a new record should be set up. Note: A new record will not be required in voluntary arrangement cases. For more information see subject ‘voluntary arrangements’ at SAM106120.

Also, as NPS cannot deal with PAYE only 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, it is necessary for a post BY/VA record to be set up. This is to deal with the liability arising from the date of bankruptcy and is in addition to a record being set up for the year of bankruptcy.

Receipt of the return

You must ensure that the return noted ‘BY Year’ is dealt with using the SA record for the pre bankruptcy period, and not the new SA record, which may have been created to deal with the years following the year of bankruptcy.

All returns for the year of bankruptcy must be submitted manually. Returns for this period cannot be submitted online.

On receipt of a return noted ‘BY Year’ the taxpayer’s record(s) should be reviewed to determine whether

  • The return can be captured in function CAPTURE RETURN

Or

  • The income and allowances should be apportioned for the pre and post Relevant Date period and entered on the taxpayer’s old and new SA record(s) using function CREATE RETURN CHARGE so that two lots of allowances are not given incorrectly by the computer

You may have difficulty in obtaining a completed SA return for the year of bankruptcy. The Official Receiver has no responsibility in this respect.

Although a completed SA return for the year of bankruptcy has not been received, you may receive either

  • A Trustee’s written statement that there is no liability for the year of bankruptcy

Or

  • A Statement of Affairs which provides evidence that there is no liability for the year

In this situation it is not intended that you put further effort into pursuing completion of the return. You should accept the evidence provided as being in place of the return, and create a nil return charge.

The statement should be placed in the annual run of returns. You should then record the action taken and the reason for it(This content has been withheld because of exemptions in the Freedom of Information Act 2000) . If the bankrupt is a Trustee these details should be placed in the Trustee’s file.

Note: There may be occasions when an SA return is handed to the Solicitor of HM Revenue & Customs at or before a Bankruptcy Hearing. Although the numbers are likely to be small it is important that any such return is identified and dealt with as a priority. Where a return is received by a member of the Solicitor’s Office in these circumstances, they will send it together with a covering memo asking for action to be taken. The memo is clearly headed ‘Bankruptcy Hearing’. You must deal with these cases as a priority, and follow the instructions on the form. HMRC may not be able to pursue its claim in the Bankruptcy Courts if this is not done.

When to use function CAPTURE RETURN

The return can be captured as normal using function CAPTURE RETURN where the taxpayer

  • Ceased employment or to trade with effect from the date of the order

Or

  • Continued in the same employment or to trade in the same trade but ceased prior to the 5 April following the Relevant Date

Or

  • Continued employment or to trade in the same employment / trade post 6 April following the Relevant Date

Or

  • Commenced a new employment prior to the 5 April following the Relevant Date and an underpayment does not arise on that source for the year of bankruptcy

Note: In cases where function CREATE RETURN CHARGE has already been used by Insolvency Claims Handling Unit (ICHU) to lodge a claim for the year

  • Unlog the earlier CREATE RETURN CHARGE (to ensure that the processing of the return is not recorded as an amendment)
  • Use function RECORD DATE OF CLERICAL ISSUE to record the actual date of issue of the return
  • After capture of the return, notify ICHU by memo to enable a claim to be made in the return amount

When capturing a return noted ‘BY Year’ you may discover that the In-year repayment box 1 of the Finishing your Tax Return section page TR 5 on the Main Tax Return (SA100) or box 12.11 on the Short Tax Return (SA200), should have been completed or that the entry is incorrect. You should repair the entry to show the correct figure.

Following capture of the return further action is required in cases where the taxpayer has continued in the same employment or to trade in the same trade post 6 April following the Relevant Date where a new record has been set up. You should review the case to see whether payments on account should be set up on the new record for the year following VA or BY.

If payments on account are due, the amount should be entered on the new record for the year of VA or BY in the Income tax due after reliefs field. A corresponding amount in the same sum must be made in the Overpayments for earlier years field to ensure a duplicate charge is not created for the VA or BY year. Payments on account will then be set up correctly.

When not to use function CAPTURE RETURN and how you should create a return charge

Function CAPTURE RETURN should not be used where the taxpayer

  • Ceased employment or ceased to trade during the year of VA/BY but commenced a new trade prior to 5 April following the Relevant Date
  • Ceased employment or ceased to trade during the year of VA/BY but commenced a new employment prior to the 5 April following the Relevant Date and an underpayment arises on that source for the year of bankruptcy

The liability should be manually calculated for the periods to and from the Relevant Date and the two liabilities entered on the two records using function CREATE RETURN CHARGE so that two lots of allowances are not given incorrectly by the computer.

All allowances and deductions for the year of bankruptcy, unless they specifically apply to a particular source, are apportioned on the fairest possible basis. This will normally be a simple time apportionment. Where that method results in a balance of unused allowances in one of the periods, you should use only enough to extinguish liability in that period and the remainder in the other period.

The following simple example illustrates the point:

On issue of the bankruptcy order, the taxpayer ceases employment or trade. Later in the year of bankruptcy he takes up employment. You authorise a WK1/Mth1 coding.

When using the completed SA return to calculate the liability to and from the Relevant Date, the allowances are time apportioned. The liability for the post bankruptcy period should equate approximately to the PAYE deductions from the post Relevant Date source. No further liability will be due for that period.

When calculating the liability manually you may discover that the In-year repayment box 1 of the Finishing your Tax Return section page TR 5 on the SA100 or box 12.11 on the SA200 should have been completed or that the entry is incorrect. You should repair the return and ensure any in-year repayment made is entered when using function CREATE RETURN CHARGE.

When entering the liability for the period from the Relevant Date on to the taxpayer’s new record in function CREATE RETURN CHARGE it is necessary to complete the screen with adjusted details to ensure payments on account for the following year are created in the right amounts.

This is because the payments on account for the following year should reflect the previous years full liability, which is the total of the pre and post Relevant Date periods. If only the post Relevant Date liability is entered, payments on account will be based on that part years liability.

There will be occasions where more than 80 per cent of the full liability for the return year has been satisfied by tax deducted at source. When the income, allowances and reliefs are apportioned, it is possible that on the apportioned figures 80 per cent or less of the post Relevant Date liability is satisfied by tax deducted at source.

In these cases to ensure that the computer does not set up payments on account by mistake, the only entry required in function CREATE RETURN CHARGE on the new record is the post Relevant Date liability in the Underpayments for earlier years field. Note: Where an in-year repayment has been made for the period from the relevant date an entry should also be made of the amount of the repayment in the Tax already refunded field.

This will result in all of the post Relevant Date liability being due as a balancing charge and no payments on account will be created for the following year.

Where more than 80 per cent of the full liability is not satisfied by deductions at source to ensure payments on account are correctly set up it is necessary to

  • Increase the entry in the Income tax due after reliefs field by the appropriate amount of the pre Relevant Date liability (SAM121272)

And

  • Increase the entry in the Overpayments for earlier years field by the appropriate amount of the pre Relevant Date liability

Where exceptionally, the appropriate amount of the pre Relevant Date liability is negative, the amount should be treated as positive and the entry in the Tax deducted at source field increased by the amount and the entry in the Underpayments for earlier years field increased by the amount.

Further action required for PAYE cases

You should check that any underpayments or potential underpayments that arose pre bankruptcy have been removed from the coding for post bankruptcy years. For more information see the ‘Employment Procedures’ manual.

Processing returns after 31 December

Do not make any repairs to the return before using function CREATE RETURN CHARGE if

  • You are processing a return after 31 December following the end of the return year

And

  • You need to repair an entry or entries

And

  • That repair(s) increases the taxpayer’s liability (This content has been withheld because of exemptions in the Freedom of Information Act 2000)  

And

  • No repayment is due

Further information is available on repairing a return after 31 December following the end of the return year, see subject ‘Repairing Returns After 31 December: Individuals’ (SAM121540).

Debt Information

The Insolvency Claims Handling Unit (ICHU) deals with claims in bankruptcies. When issuing a claim, ICHU remits all debts on the main computer systems and manual systems (such as the Miscellaneous Charges Unit), after which these records may not show the correct outstanding unpaid liabilities. If approached by a taxpayer, their representative, or Official Receiver / trustee for details of debt in a bankruptcy case, please refer the enquirer to ICHU. Do not provide any information as it may be incorrect and misleading.