In December 2013 there was a judgment in Kaye v South Oxfordshire District Council that business rates for the current tax year should be included as a debt in a Company Voluntary Arrangement even though the company had made all payments to date. The judge commented that the ruling would seem to be equally applicable for council tax bills in personal insolvency. As a result, this year the implications and guidelines for the three different forms of personal insolvency in England and Wales – bankruptcy, Individual Voluntary Arrangements (IVAs) and Debt Relief Orders (DROs) have been being worked out. The last of the ‘pieces’ has been put in place this month with the Insolvency Service’s decision on DROs. This article looks at the changes for each of the three types of insolvency.
It should be remembered that council tax is a “joint and several” liability, so an individual entering one of the forms of insolvency will only be affected by these changes in practice if they are in a household where they are the only person liable to pay council tax, or if their partner also enters insolvency at the same time.
The situation pre December 2013
Before this High Court judgment, the situation for all three forms of personal insolvency was the same and can be broadly summarised as:
- council tax arrears for any previous financial years were included
- if you were up-to-date with council tax payments for the current year, the remaining payments were not included
- if a final notice or a Liability Order had been issued after missed installments, then the current year’s payments were included.
Council tax and bankruptcy
In April 2014, the Insolvency Service updated its Technical Manual to say: “All outstanding liabilities (that is, all arrears and future instalment payments) for council tax for the year in which the insolvency commences are provable debts. This applies whether or not the company/bankrupt was in arrears at the date of insolvency.”
The effect is that council tax payments for the current financial year are no longer required. This increases the debtor’s ‘surplus income’ (unless the debtor was receiving Council Tax Reduction, in which case it will make little or no difference) and so increases any IPA which is set. The IPA will then reduce at the end of the tax year when the next year’s council tax has to be paid. This is similar to the way income tax is handled, with an NT code meaning that no tax is paid to HMRC but an IPA is paid instead.
Under these changes, debtors shouldn’t generally be better or worse off.
Council tax and Debt Relief Orders
So bankruptcy has proved relatively simple. Debt Relief Orders are however a different matter, as applying the same approach that was used with bankruptcy appeared likely to result in a Catch-22 situation, where if you qualify for a DRO you don’t have to pay council tax, so you have too much spare cash to qualify for a DRO.
On April 16th, the Insolvency Service announced that clients could choose whether or not to include council tax for the current year in their DRO. There then followed a period of confusion with changes of advice to the debt advisors who set up DROs. This has now been ended, it is hoped, with the Insolvency Service announcement on August 6th: “I am pleased to inform you that The Insolvency Service has recently obtained Counsel’s Opinion to clarify the effect of the High Court decision in Kaye v South Oxfordshire District Council on debt relief orders. The advice received by the INSS is that the decision has no effect on DROs and any future instalments to be paid are not a qualifying debt.”
That’s nice and simple – no change to the previous DRO regime because the court judgment doesn’t apply, so the Catch-22 problem doesn’t arise.
The legal argument for treating DROs differently from bankruptcy appears somewhat difficult to follow. I’m not a lawyer and I’m not going to try to explain it. It isn’t really in any one’s interest to challenge this – councils will carry on getting council tax paid; debtors always expected to pay the council tax and aren’t going to find they are barred from a DRO because of the £50 spare cash limit; and the Insolvency Service doesn’t collect any monthly payments from people on a DRO so it isn’t losing out the chance to collect any money.
Council tax and IVAs
IVAs are of course individual so it’s hard to generalise. According to the July 2014 edition of the Insolvency Practitioner’s Association magazine, many of the larger IP’s have already started to include this year’s council tax as a debt in the IVA and to increase the set monthly IVA payment for the rest of the financial year. As with bankruptcy, the net effect on the debtor is zero.
Current and closed bankruptcy / IVA cases
Might it be possible for a debtor to argue that the council tax was incorrectly collected by the council in the financial year of the bankruptcy / IVA and so should be refunded?
For bankruptcies, such a refund would probably count as after-acquired property and it would be claimed by the Official Receiver, so there would be no point.
For IVAs, Michelle Butler makes a reasoned argument on her blog here that a debtor could claim this money; that the council could not set off the refund against their unsecured claim for tax for the year; and that for protocol-compliant IVAs the IP could not demand increased contributions. She also makes the good points that it isn’t clear what the chance of “easy success” in a court are and that a debtor stopping paying council tax for the current year on these grounds “would need a strong stomach” to resist council pressure.
However, there seems to me to be no downside to a debtor in this position putting in a formal complaint to the council that the council tax paid should be refunded. If the council refuses at each stage of its internal complaints procedure, the debtor could take then take the issue to the Local Government Ombudsman.
Debtors generally aren’t going to be any better or worse off because of these changes. There is no change to DROs, and in IVAs and bankruptcy, some money that would before have been paid to the local council will instead be paid into the IVA or to the Official Receiver.
The people who will be worse off will be the local councils, who may still decide to appeal the decision. But for the moment at least there is clarity about what happens to the current year’s council tax in the various forms of insolvency.