tax assessments in bankruptcy – whose responsibility? the case of Arnold –v– Williams and HMRC

A tax assessment raised against a discharged bankrupt could only be appealed by him and not his trustee in bankruptcy - Arnold -v- (1) S J Williams (trustee in bankruptcy) (2) Revenue & Customs [2008] EWHC 218.

the background

In this case the taxpayer was made bankrupt after presenting his own petition in July 2001. After his discharge and following an HMRC investigation, tax assessments were raised from April 2006 in respect of tax due as at the date of bankruptcy. The tax assessments were sent to the trustee in bankruptcy but not the bankrupt. The assessments were followed by proofs of debt. The bankrupt provided little help in relation to these debts until the prospect of a surplus in his estate arose. The bankrupt then challenged the assessments and applied for an order within the bankruptcy proceedings directing his trustees to reverse or vary HMRC's proof for the full amount claimed by HMRC.

At the hearing of the bankrupt's application, HMRC claimed that the assessments could not be challenged in the bankruptcy court. HMRC further argued that only the trustee had the right to appeal, not the bankrupt himself under section 283 Insolvency Act 1986.

the decision

The judge considered that because the assessments had been raised after the bankruptcy, there had been no pre-bankruptcy right of appeal capable of forming part of the property vesting in the trustee, so an assessment on a discharged bankrupt could only be appealed by him and the trustee had no right of his own to do so. Any right of appeal against the assessments remained with the bankrupt as a taxpayer, and the appeal lay to the Tax Commissioners rather than by way of adjudication in bankruptcy or by the trustee in bankruptcy. In this case as the assessments had not been served on the bankrupt he was not out of time for making that appeal, nor did he need any assignment or authority of his trustee to do so. There was no obvious power in the bankruptcy court to stay the appeal proceedings before the Tax Commissioner and the bankruptcy court should generally leave it for the decision of the Tax Commissioners. The assessments were required by statute to be made on the bankrupt and therefore any entitlement to appeal was that of the person charged to the tax, not his estate or trustee in bankruptcy. In future HMRC must serve post-bankruptcy assessments in respect of pre-bankruptcy liabilities on the bankrupt and the bankrupt alone must pursue any appeal to the Tax Commissioners.

It was noted that there unless there was surplus in a case, the bankrupt would not usually be interested in pursuing any appeal. As such, as there is no machinery for appeals by a trustee, an injustice could occur between the other estate creditors and HMRC as a result of an overstated HMRC assessment.

implications for insolvency practitioner

Insolvency practitioners must note that any appeal against post bankruptcy tax assessments is for the bankrupt to make and for the Tax Commissioners to adjudicate upon rather than him as trustee in bankruptcy or the bankruptcy court. Further, insolvency practitioners must be aware that HMRC must serve post bankruptcy assessments in respect of pre-bankruptcy debts on the bankrupt and not on him as trustee in bankruptcy. The insolvency practitioner must also note that an injustice may occur between HMRC and other estate creditors, where HMRC have overstated an assessment but the bankrupt is not interested in pursuing an appeal.

If you would like further information on this topic, please contact Theo Anderton of Blake Lapthorn's Insolvency and Business Recovery team.