Bankruptcy and Zero Tax Code

[jenjenjo123]

Hi all

Thought I'd start a different thread for this just in case anyone else finds it useful.

I went bankrupt in Dec 2007 and I vaguely remember a rule about a zero tax code. I am late submitting returns (see other thread) and I'm just going through everything again now before phoning HMRC. Does the zero tax rule mean that even if I only earnt £5339 up to April 2008, I have to pay tax and is it on the full amount.

If this is the case will I also have to pay the late penalty charges and interest etc?

Thanks
Jen

 

[jenjenjo123]

bump - anyone - please :redface:

Thanks
Jen

 

[elaine@cheapaccounting]

if this is for SA 2008 2009 then there will the £100 fine for late filing at least

 

[jenjenjo123]

Hi Elaine and thanks for responding. Perhaps I should have left the question as part of the other thread which is here http://www.ukbusinessforums.co.uk/forums/showthread.php?t=148168

It relates to April 2007/April 2008. If there were no tax to pay then there would be no fine. However, would I have automatically been given a zero tax code and if so does this mean tax will be payable on the whole amount?

Thanks
Jen

 

[Jenni384]

If you're discharged I would have thought you'd be taxed as anyone else and therefore if you earned under the personal allowance for that year, you won't pay tax and thus any penalty for late submission of tax return will be reduced to the amount of the tax (i.e. nil). If you only owed say, £15 in tax for the year the penalty for late submission would be £15 and the interest payable on that amount would be minimal.

Bankruptcy isn't an area I deal with - I would have thought the offical receiver would have given you definitive advice on your tax status while you were an undischarged bankrupt.

I've not heard of a bankrupt person paying tax on everything they earn irrespective of personal allowances but, as I said, it's not my area of expertise.

 

[jenjenjo123]

If you're discharged I would have thought you'd be taxed as anyone else and therefore if you earned under the personal allowance for that year, you won't pay tax and thus any penalty for late submission of tax return will be reduced to the amount of the tax (i.e. nil). If you only owed say, £15 in tax for the year the penalty for late submission would be £15 and the interest payable on that amount would be minimal.

Bankruptcy isn't an area I deal with - I would have thought the offical receiver would have given you definitive advice on your tax status while you were an undischarged bankrupt.

I've not heard of a bankrupt person paying tax on everything they earn irrespective of personal allowances but, as I said, it's not my area of expertise.

Hi Jenni and thanks for your reply. There is a good chance that it was the OR who told me about the zero tax code but a lot has happened since then and my mind was quite numb at the time :redface:

Just to confirm I was declared bankrupt Dec 07. I continued to trade under the same trading name (as is a legal requirement whilst undischarged). I received AD in December 08. This means that I was an undischarged bankrupt during the tax year 2007/2008.

Thanks again
Jen

 

[Jenni384]

Jen
This might help

http://www.insolvencyhelpline.co.uk/tax_debt/bankruptcy.php

Tax after bankruptcy

As a general rule, the tax due for all tax years up to and including the tax year in which you are made bankrupt will be due from your Trustee - from the money he is able to raise - and not from you personally.
So if you are employed and paying tax under Pay As You Earn (PAYE), you should ask your tax office to put you onto a 'Nil' tax code immediately after the bankruptcy order. You should then be paid without income tax taken off for the remainder of the tax year. If for any reason this does not happen, and some tax is deducted after bankruptcy, this should be refunded to you by the Revenue. However, if you move to a different employer, this rule ceases to apply and tax should be deducted on an 'emergency' basis.
If you are self-employed, your duty to pay tax directly to the Revenue will no longer apply to the tax year of bankruptcy or any previous year. You start paying tax directly from the following tax year.
One exception to the last rule affects self-employed work ers in the construction industry, who have tax taken off their earnings at a flat rate of 18%. This deduction continues after bankruptcy, and the amounts that are deducted between your bankruptcy order and the following 5 April are paid by the Revenue to your Trustee.
Further information and advice

Bankruptcy is a complex matter and more information is given in a Guide to Bankruptcy published by the Insolvency Service of the Department of Trade and Industry. Copies are also available by phoning Insolvency Service Publications: 01254 682702 and on their website at www.insolvency.gov.uk.
If you want personal advice and can afford to pay for this, you might seek help from an authorised insolvency practitioner and a list should be available from your local court or Official Receiver's office.

 

[jenjenjo123]

Aaaah I see now. I thought the zero tax code meant I could earn zero before being taxed at the standared rate. If I'm now reading this right, then a zero tax code means I pay zero tax for the remainder of the tax year in which I was declared bankrupt.

If this is the case then it seems a bit rum to say the least. If someone goes bankrupt in May and then earns say £100K in the remainder of that tax year, is it correct that they pay no tax on their £100K?

Sorry to harp on I just want to make sure I'm doing all of this right

Thanks again Jenni
Jen

 

[Jenni384]

Aaaah I see now. I thought the zero tax code meant I could earn zero before being taxed at the standared rate. If I'm now reading this right, then a zero tax code means I pay zero tax for the remainder of the tax year in which I was declared bankrupt.

If this is the case then it seems a bit rum to say the least. If someone goes bankrupt in May and then earns say £100K in the remainder of that tax year, is it correct that they pay no tax on their £100K?

Sorry to harp on I just want to make sure I'm doing all of this right

Thanks again Jenni
Jen

Yep that's my understanding of it.

I think that in the case of the person earning 100k though, the receiver would take a chunk of that to pay off the creditors before they were discharged, they wouldn't get to keep all of it!

Don't be daunted by the tax returns; take a deep breath, get them done and you'll feel much better once it's sorted. Feel free to come back and ask for help

 

[Dave Shaw]

Theoretically any benefit the bankrupt would obtain by the operation of this would be dealt with through an income payment order (or agreement) - i.e. the tax benefit would be paid over to the trustee in bankruptcy for the benefit of creditors.

It is also possible in these situations for a bankrupt to receive a cash rebate of tax paid if the zero code is not applied from the comencement of the bankruptcy - however in such circumstances as with the monthly benefit of not paying tax, expect to have to pay this over to the trustee.

 

[jenjenjo123]

Thanks Jenni for all your help and support and you too Dave

It's all starting to come back to me now IPA's, IPO's etc ... the fog is starting to clear only I'm not sure I want it to at the mo

I had to go out so I missed the call to HMRC but I promise I will eat all of my frogs before breakfast in the morning

Thanks again all
Jen x











Did I mention I don't do breakfast and often have cereal for dinner - sorry :redface: