HMRC and IVAs: Can Tax Debts Be Included in an IVA? (A UK Guide)

If you owe money to HMRC and are struggling to keep up with your tax bills, you might be wondering whether an Individual Voluntary Arrangement (IVA) could help. Dealing with tax debts can feel overwhelming, but there are options that could make repayment more manageable. 

In this guide, we explain how HMRC treats IVAs, which tax debts can be included, and what you need to know before starting an IVA. So, read on to find out if an IVA could be the right solution for your situation. 

What Is an IVA?

An Individual Voluntary Arrangement (IVA) is a formal agreement that helps you pay back your debts through affordable monthly payments. It is set up and managed by an Insolvency Practitioner (IP), who acts as the middle person between you and your creditors.

An IVA allows you to combine several unsecured debts into one monthly payment based on what you can afford. Once the IVA is approved, your creditors must stick to the agreement and cannot chase you for more money, add extra interest, or take further action.

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How an IVA Works

An IVA usually lasts between five and six years. During this time, you make one fixed monthly payment to the IVA provider. They then divide this payment among your creditors.

If you complete the IVA, any remaining unsecured debt included in the agreement may be written off.

However, keep in mind that your monthly payment is worked out by looking at your income, your household bills, and how much money you need for essential living costs. You only pay what you can reasonably afford.

Who an IVA Is For

An IVA is mainly for people who:

• Have several unsecured debts.
• Owe money to more than one creditor.
• Can afford to make regular monthly payments.
• Live in England, Wales, or Northern Ireland.

It is often used by people who want to avoid bankruptcy and need a structured way to manage their debts.

How Payments Are Set

Payments are based on a full review of your finances. Your IVA provider will look at:

• Your income.
• Your household spending.
• Your essential living costs.
• Any assets you have.

After this review, they calculate a monthly amount that is fair and manageable. This is then written into your IVA proposal. If your creditors agree to the proposal, the payment becomes fixed, although it can be reviewed each year in case your situation changes. 

What Is HMRC?

HMRC (His Majesty’s Revenue and Customs) is the UK government department responsible for collecting taxes. This includes Income Tax, VAT, Corporation Tax, National Insurance, and other payments owed to the government.

HMRC also handles tax refunds, benefits, and ensures people and businesses follow UK tax rules.

When you owe money to HMRC, they have strong powers to recover the debt. This can include taking money from your wages, freezing your bank account, adding penalties, or starting legal action. Because of this, dealing with HMRC debt quickly is important. 

How HMRC Views IVAs

HMRC is one of the biggest creditors in many IVA cases, especially when someone owes tax, VAT, or National Insurance. Because of this, HMRC has strict rules for approving an IVA.

When an IVA proposal is sent to HMRC, they will look at your full financial situation, your tax history, and whether you have kept your tax returns up to date. They also look at your behaviour, such as whether there are any instances where you have missed payments without a valid reason.

HMRC as a Major Creditor

HMRC’s vote can have a big impact on whether an IVA is approved. If HMRC is owed a large part of your total debt, their vote can decide the outcome. They usually expect the IVA to offer the best return possible compared to other options like bankruptcy.

When HMRC Agrees to an IVA

HMRC may agree to an IVA when:

• All tax returns are up to date.
• Your income and spending details are accurate.
• You can afford the proposed monthly payment.
• You stop building new tax debts.
• The proposal treats all creditors fairly.

Remember, HMRC supports IVAs that show genuine financial difficulty and provide a reasonable repayment plan. However, if your tax affairs are not fully up to date or the proposal seems unrealistic, HMRC may reject it. 

Can Tax Debts Be Included in an IVA?

Yes, as we mentioned briefly before, most tax debts can be included in an IVA.

This includes Income Tax, VAT, Corporation Tax, National Insurance, and PAYE arrears. When these debts are added to an IVA, they are treated like any other unsecured debt, meaning interest and charges are frozen and you make one affordable monthly payment.  

Debts That HMRC Will Not Include

HMRC will not include certain types of tax debts in an IVA, even if other tax arrears are accepted. These excluded debts are usually linked to serious issues such as fraud, dishonesty, or very recent liabilities that HMRC expects to be paid in full.

Some of these debt types are as follows: 

• Fraud-Related Tax: Any tax debt linked to fraud or deliberate wrongdoing cannot be added to an IVA. HMRC treats these debts as a priority and requires full repayment.
• Penalties for False Claims: Penalties issued because of false statements, incorrect information, or deliberate misuse of the tax system cannot be included. These penalties remain separate and must be paid directly to HMRC.
• Recent Tax Debts in Some Cases: Very recent tax debts may be refused if HMRC believes they should have been paid as part of your normal tax obligations. If HMRC feels the debt was created due to poor budgeting or non-compliance, they may choose not to include it in the IVA. 

How an IVA Affects Ongoing Tax Bills

An IVA only covers the tax debts you already owe at the time the agreement is approved. Any new tax bills that arise after the IVA starts must be paid separately and on time. This means you must keep up with future Income Tax, VAT, Corporation Tax, National Insurance, and PAYE payments as normal.

During the IVA, HMRC expects you to file your tax returns on time and pay any new tax in full. If you fail to do this, you could build up new tax debts that are not included in the IVA. This can lead to HMRC taking action again and may even put your IVA at risk of failing.

Furthermore, your IVA provider will review your income each year. If your earnings increase, your monthly IVA payment may change, but your new tax bills remain your responsibility. Staying up to date with tax is essential to keep your IVA running smoothly. 

HMRC’s Extra Requirements in an IVA

HMRC has stricter rules than many other creditors when you include tax debts in an IVA. They expect you to follow certain conditions throughout the agreement to make sure your tax affairs stay in order.

Their requirements can include the following:

• Fixed Monthly Payments: HMRC expects your IVA payments to be realistic, affordable, and consistent. They want the payment amount to be fixed and based on your true income and essential living costs. If your income changes, they may expect the IVA provider to review your payment.
• Keep Returns Up to Date: You must file all tax returns on time during the IVA. HMRC will not accept late submissions, and failing to keep returns up to date can cause serious issues. Late returns may also lead to new penalties that cannot be included in the IVA.
• Stop New Debts: HMRC requires that you do not build any new tax debts. Any unpaid VAT, Income Tax, or other tax due after the IVA starts will not be covered by the arrangement. New tax arrears can cause HMRC to challenge the IVA or take separate action.
• Give Full Income Details: You must provide complete and accurate income information to both your IVA provider and HMRC. This includes details of wages, self-employment income, benefits, and any changes to your financial situation. HMRC expects full transparency before and during the IVA.

Following these requirements is essential to keep the IVA valid and prevent additional action from HMRC. 

Pros of Including HMRC Debts in an IVA

Including your HMRC debts in an IVA can offer several benefits:

• One Monthly Payment: All your unsecured debts, including tax debts, are combined into a single, manageable monthly payment. This makes budgeting easier and reduces stress. 
• Stops Action from HMRC: Once the IVA is approved, HMRC cannot take further legal action to recover the debts included in the arrangement. This provides peace of mind and protection from aggressive collection methods. 
• Interest and Charges Frozen: Any interest, penalties, or additional charges on your included tax debts are usually frozen for the duration of the IVA. This prevents your debt from growing while you repay it. 
• Chance of Writing Off Remaining Debt: If you complete the IVA successfully, any remaining tax debt included in the agreement may be written off, giving you a fresh financial start. 

Cons to Think About

While an IVA has benefits, there are also some important drawbacks:

• Long Commitment: An IVA typically lasts five to six years. You must commit to regular payments over this period. 
• Strict Rules from HMRC: HMRC will monitor your compliance closely, and failing to meet their requirements can put your IVA at risk. 
• You Must Stay Up to Date with Tax: Any new tax obligations during the IVA must be paid in full. Falling behind could create additional debts outside the IVA. 
• IVA Will Impact Your Credit File: An IVA is a formal debt solution and will remain on your credit record for six years, which may affect your ability to borrow money or get credit. 

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When an IVA May Not Work for HMRC Debts

While an IVA can be a helpful solution for many, it may not be suitable in some situations, especially when dealing with HMRC debts.

Here’s what you need to know in general:

• High Tax Arrears: If your tax debts are extremely large, HMRC may decide that an IVA does not provide a sufficient return. In such cases, other solutions like bankruptcy might be considered more appropriate. 
• Past Issues with Compliance: HMRC looks at your history of tax compliance. If you have repeatedly missed payments, submitted inaccurate returns, or had enforcement actions taken against you before, they may be less likely to agree to an IVA. 
• Not Enough Income for Stable Payments: An IVA relies on you being able to make regular monthly payments. If your income is too low or unstable, you may not be able to meet the payment requirements, making it difficult for HMRC and other creditors to approve the IVA. 

In these situations, it’s important to seek professional advice to explore alternative debt solutions that may better suit your circumstances. 

What Should I Do If My Debts Are Huge And I Cannot Afford To Settle Them?

Sometimes, it may be difficult to agree on a payment plan with your creditor or debt collection agency, particularly if the payments are financially overwhelming.

In such cases, you might want to explore potential debt solutions in the UK. There are several options available in the UK, each with its own eligibility criteria. Choosing the right option can help resolve your debt issues, but the wrong one may make your financial situation worse.

However, it is essential to seek professional advice before committing to any debt solution. A debt advisor can help you assess your situation and guide you in selecting the most appropriate option.

Some of The Key Debt Solutions Available in England, Northern Ireland, and Wales:

• Debt Management Plan (DMP): An informal arrangement where you make monthly payments toward your debts. There is no legal commitment, but your creditors may agree to reduce interest or freeze fees.
• Debt Relief Order (DRO): Designed for individuals in severe financial distress, this option freezes interest and allows a year of no payments, potentially leading to debt resolution.
• Bankruptcy:  A formal legal process that can clear most debts if you are unable to repay them. Bankruptcy provides a financial reset, but it also has serious long-term consequences, including restrictions on your financial affairs and potential asset loss.

Debt Solutions Available in Scotland

1. Protected Trust Deed: A formal agreement to repay part of what you owe over four years. The remaining debt may be written off afterward. It is legally binding and affects your credit rating.
2. Debt Arrangement Scheme (DAS): A government-backed scheme allowing you to repay your debts through a Debt Payment Programme (DPP) based on what you can afford. Interest and charges could be frozen, and creditors can’t take legal action.
3. Sequestration (Scottish Bankruptcy): A formal insolvency process where most debts may be written off, but assets may be sold to repay creditors. It offers a fresh start but comes with serious consequences.
4. Minimal Asset Process (MAP): A simplified form of bankruptcy designed for individuals with low income and few assets. It allows eligible debts to be written off after six months, provided the individual fully cooperates with the process. However, in practice, the process may take longer depending on the complexity of the case. MAP also offers lower fees and reduced administrative burden compared to full bankruptcy.

Caution: These debt solutions have both advantages and drawbacks, so it’s important to carefully weigh your options before making a decision.

Furthermore, if you are unsure which debt solution suits your situation, speak to a professional debt advisor. Free, independent advice services like MoneyHelper can help you assess your finances and find the best option for you. 

Steps to Start an IVA With HMRC Debts

Starting an IVA that includes HMRC debts involves a few important steps. Following them carefully will improve the chances of your IVA being approved and running smoothly.

Here are the general steps to apply for an IVA:

1. Speak to an IVA Provider

The first step is to contact a licensed Insolvency Practitioner (IP) or an IVA provider. They will assess your financial situation, explain your options, and help you understand whether an IVA is suitable for your HMRC debts.

2. Give Full Tax Information

You must provide complete details of all your income, assets, expenses, and outstanding tax debts. HMRC and your IVA provider need accurate information to calculate a fair and affordable monthly payment.

3. Submit the Proposal

Your IVA provider will prepare a formal IVA proposal, outlining your monthly payment, how long it will last, and which debts are included. This proposal is then submitted to all your creditors, including HMRC, for consideration.

4. HMRC Voting on the IVA

Once the proposal is submitted, creditors vote on whether to accept it. HMRC, as a major creditor, will carefully review the proposal to ensure it is fair and achievable. If the majority of creditors agree, the IVA is approved, and the repayment plan officially begins.

Following these steps ensures your IVA is set up correctly and increases the likelihood of HMRC accepting your debt arrangement. 

Final Thoughts

Dealing with HMRC tax debts can feel overwhelming, but an Individual Voluntary Arrangement (IVA) offers a structured way to manage repayments and gain some financial relief. While most tax debts, including Income Tax, VAT, Corporation Tax, National Insurance, and PAYE arrears, can be included in an IVA, HMRC has strict rules to ensure the arrangement is fair and sustainable.

An IVA can simplify payments, freeze interest and charges, and even write off remaining debts if completed successfully. However, it also comes with long-term commitments, strict compliance requirements, and an impact on your credit record.

If an IVA isn’t suitable due to high tax arrears, past compliance issues, or insufficient income, there are alternative debt solutions available across the UK, including DMPs, DROs, bankruptcy, and Scottish-specific options like Protected Trust Deeds or DAS. Seeking professional advice is essential to choose the right path for your situation.

Ultimately, understanding your options and taking action early can help you manage HMRC debts effectively and work toward a fresh financial start. 

Key Takeaways

• An Individual Voluntary Arrangement (IVA) is a formal debt solution allowing you to repay debts through one affordable monthly payment. 
• Most tax debts, including Income Tax, VAT, Corporation Tax, National Insurance, and PAYE arrears, can be included in an IVA. 
• HMRC is a major creditor and has strict rules when agreeing to include tax debts in an IVA. 
• Some tax debts cannot be included, such as fraud-related tax, penalties for false claims, and certain recent tax liabilities. 
• IVA payments are based on your income, essential living costs, and household spending, ensuring they are affordable.  
• During an IVA, you must keep up with new tax obligations, submit returns on time, and avoid building new debts. 
• Including HMRC debts in an IVA can stop enforcement actions, freeze interest and penalties, and potentially write off remaining debt. 
• An IVA is a long-term commitment (typically 5–6 years) and will impact your credit file. 
• An IVA may not work if you have very high tax arrears, past compliance issues, or insufficient income for stable payments. 
• If an IVA isn’t suitable, other UK debt solutions like DMPs, DROs, bankruptcy, or Scottish-specific options may provide alternative ways to manage debt.  

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