Tax Debt and Time to Pay: A Complete UK Guide

If you owe tax to HMRC and cannot pay in full by the due date, you should not ignore the debt. HMRC has extensive debt collection powers, but it also offers Time to Pay arrangements that allow you to spread your tax payments over a period. Acting promptly and communicating with HMRC is essential to avoid enforcement action and additional penalties.

Time to Pay Arrangements

HMRC's Time to Pay (TTP) service allows individuals and businesses to agree a payment plan for tax debts they cannot pay in full. TTP arrangements are available for most taxes, including income tax, corporation tax, VAT, and national insurance. The arrangement typically lasts up to 12 months, although longer terms may be available in exceptional circumstances.

To apply for a TTP, you must demonstrate that you cannot pay the tax in full due to genuine financial difficulty, that you have no other means of raising the funds, and that you will be able to meet the agreed instalments. HMRC will ask for details of your income, assets, and liabilities, and may request supporting evidence such as bank statements and cash flow forecasts.

Business Payment Support Service

The Business Payment Support Service (BPSS) is HMRC's dedicated service for businesses that are struggling to pay their tax. The BPSS can arrange TTP agreements for VAT, PAYE, corporation tax, and other business taxes. The service is available by phone and online, and applications are usually processed quickly.

The BPSS is particularly useful for seasonal businesses that have uneven cash flows, businesses facing unexpected costs, and those affected by economic downturns. HMRC takes a commercial approach to BPSS applications and will generally agree to a payment plan if the business can demonstrate a realistic ability to pay.

Instalment Plans

Instalment plans allow you to pay your tax debt in monthly or quarterly payments. The amount of each instalment depends on the total debt and the length of the plan. HMRC charges interest on the outstanding balance from the original due date, but the interest rate is generally lower than commercial borrowing rates.

For self assessment debts, you can apply for a TTP online through your HMRC online account for debts up to £30,000. Larger debts require a phone application and may need approval from a specialist team. HMRC will not normally agree to a TTP if you have a history of non-compliance or if the debt has already been passed to debt collection.

HMRC Debt Collection

If you do not pay your tax and do not agree a TTP, HMRC will escalate its debt collection efforts. The first step is usually a series of reminder letters and telephone calls. If the debt remains unpaid, HMRC can issue a statutory demand, instruct bailiffs (enforcement agents) to seize goods, apply for a charging order over your property, or take you to court.

HMRC's debt collection teams have access to real-time information about your income, assets, and bank accounts through the Connect system. They can identify undisclosed assets and take enforcement action accordingly. The cost of enforcement is added to the debt, making it more expensive the longer you delay.

Enforcement Powers

HMRC has several enforcement powers that it can use to recover unpaid tax. These include:

• Distraint: seizing and selling goods belonging to the taxpayer
• Third-party debt orders: requiring a third party (such as a bank or tenant) to pay money directly to HMRC
• Attachment of earnings: requiring an employer to deduct money from wages and pay it to HMRC
• Legal proceedings: obtaining a county court judgment (CCJ) and enforcing it through the courts

HMRC typically exhausts these options before resorting to insolvency proceedings, but it will not hesitate to use them if the taxpayer is uncooperative.

Charging Orders

A charging order is a court order that secures a tax debt against your property. Once a charging order is in place, HMRC can apply for an order for sale of the property to recover the debt. Charging orders are most commonly used for larger tax debts where the taxpayer owns property but has refused or failed to pay.

Getting a charging order does not require you to sell your home immediately, but it gives HMRC a secured interest in the property. If you later sell the property, HMRC's debt is paid first from the proceeds. In serious cases, HMRC can apply for an order for sale, forcing you to sell your home.

Bankruptcy and Liquidation

As a last resort, HMRC can petition for your bankruptcy (if you are an individual) or the liquidation of your company. HMRC is one of the largest petitioners for bankruptcy and liquidation in the UK. A bankruptcy petition can be presented for debts of £5,000 or more, and it can have severe consequences, including the loss of your assets and restrictions on your ability to act as a company director.

If you are facing bankruptcy or liquidation, you should seek professional advice immediately. An individual voluntary arrangement (IVA) or a company voluntary arrangement (CVA) may be a better alternative, allowing you to repay a portion of the debt over time while avoiding the most serious consequences of formal insolvency.

Browse more UK tax compliance and disputes guides or try our calculators.