How are council tax debts – and the remainder of the current year’s council tax – treated in insolvency?
This has happened following the 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.
The situation before 2014
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 instalments, 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.
“Provable debts” is the legal term for debts which are included in your bankruptcy. Even if you were up to date with your council tax and so you probably didn’t think you were in debt at all. Which may seem very strange, but that’s the way it is.
The effect is that you don’t have to make any council tax payments for the current tax year.
This may increase your ‘surplus income’, resulting in a higher Income Payments Agreement (IPA). The IPA will then reduce at the end of the tax year and you have to start paying council tax to the council again.
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, you won’t generally be better or worse off – instead of paying the council you will pay more to the official Receiver for the first tax year.
Council tax and Debt Relief Orders
The problem with Debt Relief Orders (DROs), is that there are no payments made to the Official Receiver and you can’t have a DRO if you have more than £50 surplus income.
So if the bankruptcy approach was used with DROs there would be a Catch-22 situation, where if you qualify for a DRO you don’t have to pay council tax which would mean you had too much surplus income to get a DRO.
In August 2014, the Insolvency Service ended a period of confusion with the following announcement: “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.
It’s not clear what the legal argument for treating DROs differently from bankruptcy is. But it isn’t in any one’s interest to challenge this! Under this new ruling 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.
So what council tax debts are included in a DRO? This is worth clarifying:
- at the start of a year you have the right to pay in instalments. If you get into arrears you lose this right and the whole of the council tax for the rest of the year becomes due. If this has happened, the council tax arrears will go into your IVA, even if the council hasn’t yet got a Liability order.
- if you are up to date with your council tax instalments or are only behind by a bit so you can still continue to pay in instalments, the council tax bill for the year will not go into your DRO and you will have to continue to pay it.
Council tax and IVAs
IVAs are of course individual so it’s hard to generalise. But from 2014 it became common to include this financial year’s council tax as a debt in your IVA, even if you weren’t in arrears. This increases your IVA payments for the very early part of your IVA as you won’t be paying the council tax, but after the end of the tax year your IVA payments will drop and you resume paying council tax.
This all seems a rather complicated way of achieving not very much. And sometimes councils don’t understand what is happening and you may get cross letters threatening Liability orders and bailiffs – any of these should be sent to your IVA to resolve.
What if you have a partner?
Council tax is a “joint and several” liability, so if you live with a partner or another adult who is liable to pay council tax (some people such as students aren’t), then if you go bankrupt or enter a DRO or IVA, then your partner just becomes liable for the council tax arrears instead.
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.