Can I claim insolvency on my taxes?

If you or your business is facing insolvency, it can be a stressful and confusing time. Between managing debts, speaking with creditors, and dealing with the emotional toll, it’s easy to feel overwhelmed. One of the key concerns people often have is how insolvency affects their tax position – and whether it’s possible to claim insolvency on their taxes to reduce liabilities.

Here at Bridge Newland Limited, our advice regarding tax matters is always to contact an accountant or tax professional first as they are the ones who are qualified to provide such advice. As we are not practicing accountants, your accountant would always be more up to date with the current tax rules, which change so frequently, so your first point of call should be them.  However, for all insolvency matters, we are more than happy to help and therefore the short answer to the above question is: no, you can’t directly claim insolvency as a tax deduction. Insolvency itself is not a deductible event or status that reduces your tax bill. However, there are important tax implications and possible reliefs available to individuals and businesses in this situation. Understanding how insolvency interacts with tax law can help you manage your obligations more effectively – and possibly reduce the amount you owe through legitimate channels.

Can bankruptcy affect your taxes?

If you’re declared bankrupt, most debts, including taxes, are written off or included in your bankruptcy. This means that as an insolvent individual, you usually won’t be liable for unpaid income tax, National Insurance or VAT that was due before the date of bankruptcy, but you will be liable for any tax debts that you incur after this date. Once you’ve officially been declared bankrupt, HMRC will no longer chase your old tax debts.

Tax refunds and allowances for insolvent individuals

If you’ve overpaid your taxes in the years before you become insolvent, you may still be entitled to claim a rebate or refund. It’s important to note that this is not always the case, and HMRC may use these funds to offset some of the money you owe them. 

Corporation tax and liquidation for insolvent companies  

If your company becomes insolvent and goes into liquidation, the Insolvency Practitioner will handle all further communications with HMRC as part of the winding-up process. During this process, any outstanding Corporation Tax will be listed as a debt, and HMRC becomes a creditor. As a creditor, they may receive a portion of the debt owed to them through the sale of company assets. 

Insolvency loss reliefs

If your company made a loss in its final trading period, it may qualify for a valuable tax relief for insolvent companies called loss carry-back. If your company qualifies, you may be able to: 

• Offset losses against profits from previous trading periods 
• Claim a tax refund from HMRC for earlier trading periods

Do written-off debts impact taxes?

If you or your company has debts written off after you’ve become insolvent, there can be tax implications to be aware of. For individuals, written-off personal debts are not generally taxed. However, for companies, if a creditor writes off a debt, it may count as taxable income.

Your accountant and Insolvency Practitioner can help you determine how to treat these transactions to ensure you are acting honestly and transparently. They’ll also be able to advise on any tax reliefs you may be entitled to claim. 

Do you still need to file a tax return? 

Yes, absolutely. If you or your business is insolvent, you must still file a tax return. HMRC expects you to file any outstanding returns, regardless of whether you can pay the tax. Failure to file on time can result in penalties and interest charges, which could worsen your financial situation.

Need insolvency advice?

Insolvency is complex, especially when tax issues are involved. Getting expert advice early can help you manage the situation with clarity and confidence. If you’re unsure about what to do next, please reach out to a friendly member of our team at Bridge Newland. 

We’re here to help guide you through the process and ensure you understand your obligations and your options.

Categorised in: Insolvency Reviews & Advice