Income Tax Debt

Income tax for most self employed business owners is worked out on your self assessment tax return. If you don't send HMRC a tax return, they will estimate the amount you have to pay (this is called a determination). If you've not submitted a tax return, you won't be able to appeal this figure, and that is the final amount you are required to pay back.

Even if your tax return is late, you should always send it in. There are penalties and fees associated with a late tax return, however, and this can be added to the amount you are required to repay. All income tax payments have interest added to the debt at a set rate, and it is unlikely that HMRC will stop adding this interest. This can put you in substantial amounts of debt relatively quickly without a proper debt solution.

If you are in financial distress and you are unable to pay your income tax debt, you may be able to make monthly repayments - but this is generally only for up to six months. If you still cannot make these repayment terms, you should contact the HMRC Business Payment Support Helpline.

VAT Arrears

VAT is added to most non-essential goods and services, including B2B services. You or your business should be registered to pay VAT if your annual turnover is above a certain amount. VAT arrears is generally a priority debt and HMRC will not allow you to pay in instalments unless you have contacted them directly.

You should submit a budget to HMRC showing that you're offering everything you can afford to give them. If this is the case, HMRC will usually let you pay in monthly instalments for up to 12 months. However, if you don't submit a budget, they may well ask you to clear up any outstanding VAT arrears in three months or less.

If you are self-employed, and you are looking to resolve your financial difficulties, an Individual Voluntary Arrangement (“IVA”) may be an appropriate solution. It can also help where you have been a Company Director but are now liable under a personal guarantee for outstanding company debt.

An IVA is a legal agreement between you and your creditors. The agreement allows you to propose either an affordable monthly payment, over a specific length of time, usually 5 to 6 years, or a one-off lump sum. It requires 75% of creditors to approve it and provided you comply with the terms, after the specific period, any outstanding debt is written off. The IVA can be a flexible solution that allows you to tailor the arrangement around the needs of your business. It also protects your assets if approved by your creditors. 

An IVA is an appropriate option if you have a range of unsecured debts, and are unable to pay all of your creditors back. While an IVA may seem like an unappealing option for creditors, it actually offers them more reliable and favourable terms than if you were to petition for your own bankruptcy and you are unable to pay back your debts.

Where the ongoing self employed business is no longer viable, or the financial difficulties are too much, then bankruptcy is an option. You will need to submit an application to petition for your bankruptcy, or a creditor would need to submit a petition against you.

Once granted, a third party called the Official Receiver is placed in charge of your assets and liabilities, however, your creditors are no longer able to take legal action against you. It is likely the Official Receiver will look to wind down the business operations, with a view to collecting any outstanding debt owed to it, or selling any assets that are not required.

In certain circumstances you will be allowed to continue trading, for example, if you are a plumber or an electrician however, this will likely be in a reduced capacity (e.g. without employees, or a separate premises) and you can’t trade under any other name than the one you were declared bankrupt under.

A debt management plan can be used to help compartmentalise your business debts from your personal life. 

A debt management plan is an agreement between you and your creditors that you will pay a set amount of money every month towards your debts. This is based on what you can afford, not what your creditors are asking for.

On a debt management plan, a third party will deal directly with your creditors on your behalf. This can help you to put a level of separation between your business debt concerns and your personal or family life.

Debt Consolidation Loans are ideal for instances where you have outstanding debt with multiple creditors. A debt consolidation loan essentially pays off your outstanding debt, and then requires you to pay back the one individual loan.

This can help reduce the mental load associated with multiple debts, and allow you to ensure your business debt is kept in one place, rather than having multiple creditors chasing you for business and/or personal debts all at once.

Administration Order

An administration order can be filed by any director, shareholder or creditor, and can only be filed by court orders. Under an administration order, an insolvency practitioner (IP) is appointed as Administrator and has full authority over the company until a reorganisation plan can be put into place and the business made viable again.

The administration order puts in place a moratorium, which gives the company legal protection from its creditors for 12 months, however, if the business continues to trade, it will need to ensure it can cover the costs of ongoing supplies.

Company Liquidation

Usually, liquidation is the last resort for both business owners and creditors, and there will generally be a range of business debt solutions on the table before liquidation becomes an option. However, in some cases, it is the only way for business owners to settle their bad business debt. 

During the liquidation process, a company is shut down, its assets are sold and its employees are all made redundant. Creditors will usually receive a lot less than what they are owed, and because creditors are not paid in full, shareholders will not receive any money. However, it does provide a legal stopping point for debt, which can be reassuring for business owners.

The Company can either be placed into liquidation voluntarily by the Company Directors, or an application can be made.