The guidelines for the inclusion of council tax debts in the three different forms of personal insolvency in England and Wales – bankruptcy, Individual Voluntary Arrangements (IVAs) and Debt Relief Orders (DROs) changed in 2014.
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.”
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. So bankruptcy has proved relatively simple.
Council tax and Debt Relief Orders
If the bankruptcy approach was used with Debt Relief Orders (DROs) there would be 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.
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.
The legal argument for treating DROs differently from bankruptcy appears somewhat difficult to follow but it isn’t 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.
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. According to the July 2014 edition of the Insolvency Practitioner’s Association magazine, many of the larger IP’s have are now including this year’s council tax as a debt in the IVA and increasing the set monthly IVA payment for the rest of the financial year. As with bankruptcy, the net effect on the debtor is zero.
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.
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.