This is a guest post by Nick Payne, a Chartered Accountant and Insolvency Practitioner who works for Payplan. Nick has over 20 years experience in Personal Insolvency.
If you’re self-employed or own a small company and are struggling to pay your debts, you’re not alone. Recent research has shown that:
- those who are self-employed are more likely to have unmanageable debts than employed and unemployed people; and
- self-employed workers are likely to owe nearly 40 per cent more than those who are employed.
It is understandable that you may feel under a lot of stress as your business as well as your personal well-being may be impacted by your debts.
However, it’s critical that you face up to any financial difficulties and take action as early as possible to protect your business. The sooner you take action and begin a debt solution, the sooner you can prove to the people you owe money to, that you are taking the matter seriously. This could avoid legal action which may affect your assets and also stop your debts increasing due to additional interest and charges being added.
Getting debt advice
Debt advice for the self-employed is not widely publicised. Specialist advice can help you assess how your business and debts will be treated in the different debt solutions available. For example, it can be difficult for self-employed clients to know what they can afford to pay towards their debts each month. It is common that the business and personal income and expenditure are not separated and instead just shown on a single income and expenditure form, so the profitability of the business is not known.
There may be fewer suitable debt solutions. For example, in bankruptcy, your business may be closed so you are unable to trade, obviously a concern when you may have spent years building up their business. Any business assets you own may sometimes be sold and any employees laid off. If you are a Director of a Limited Company or concerned with promotion, formation or management of a Limited Company, you will not be able to continue to act in that capacity.
A longer term plan such as a Debt Management Plan (DMP), where you make one reduced monthly payment to the people you owe money to until the debts have been repaid in full, may not be appropriate as the tax authorities and trade debts often require payment in full within one to two years. The people you owe money to are also able to take legal action while you are in a DMP.
IVAs were designed to work for the self-employed
There is a further option that may be suitable if you are self-employed and struggling to pay your debts. This is called an Individual Voluntary Arrangement or IVA, for short. IVAs were designed as an alternative to bankruptcy, with the intention of making it easier for you to continue to trade, without the restrictions imposed by bankruptcy, retain your assets, and protect the jobs of any employees.
In an IVA, you will make one affordable monthly payment to an Insolvency Practitioner who will then distribute to all the people you owe money to. If you stick to the terms of the IVA, the rest of your debt will be written off at the end of the IVA. IVAs usually last for between five and six years. It is possible to propose an IVA for anyone who is self-employed or submits a tax return, if you can make a reduced payment to your debts.
How much would you have to pay?
In order to put together an IVA proposal, you will need the services of an Insolvency Practitioner. They will help you put together a forward-looking business cash-flow for the next twelve months projecting the income and expenditure of the business. This will show your creditors that the business is profitable and you are able to make reduced monthly payments to them. This helps you clearly see how profitable your business is, and ensure there is an allowance to pay all your essential business costs such as travel, materials and premises.
Your monthly income from the business after tax will then be used to pay your personal living costs, with the amount left over being the amount of money that you can afford to pay the IVA each month. Calculating the amount you are able to pay is essential to the success of the IVA.
It doesn’t matter if your income fluctuates and you can’t commit to a regular fixed amount. Your IVA monthly payments can be flexible, taking into account any seasonal fluctuations in income. For example, if you’re a gardener and receive most of your income in the summer months and not as much in the winter months, then you can make payments to your IVA as and when you receive your income, providing you pay in the agreed amount over the course of a year.
Drawing up an IVA proposal
If you are faced with legal action by anyone you owe money to, the Insolvency Practitioner can speak to them, with a view to putting the legal action on hold while your IVA proposal is drawn up. If your IVA is approved, none of the people included in your IVA can take any legal action against you or add any interest or charges to your debts.
The Insolvency Practitioner can also negotiate with the tax authorities on your behalf if you are in arrears with Tax or National Insurance payments. Before accepting an IVA, HMRC expects to see that your tax returns are up-to-date, that you have put together a realistic and achievable cash-flow and that there is a thorough explanation for any previous broken payment arrangements.
If you have credit facilities with your bank, they can use the right of offset to freeze your bank account (personal or business) and use the funds in your account to repay other debts owed to them. The impact can be devastating, but it’s a situation that’s easy to mitigate by opening an account with a company you have no debts with.
You can usually keep all your business assets in an IVA. The people you owe money to normally understand that without the assets, you will not be able to trade which will reduce the amount you will be able to pay back.
It is possible to prioritize certain debts if you need to pay them in full to continue to trade. If for example, you’re a restaurant owner and need to pay a certain supplier in full as you need them to allow you to continue to trade, it is possible to treat them as a priority on your cash-flow so they receive payment in full and continue to supply to you.
Will an IVA be approved?
IVAs are accepted in a high percentage of cases, as the amount you will pay back in the IVA will give a better return in a reasonable time-scale than alternative debt solutions like bankruptcy.
In the unlikely event that your IVA is rejected, you don’t necessarily have to go bankrupt. It is possible to consider other debt solutions, whether that is proposing another IVA or putting forward a Debt Management Plan.
During the IVA
Don’t worry about projecting your budget over a five year period. Though it’s important to be as accurate as possible, your IVA will be reviewed annually, so if your circumstances change, for the better or otherwise, it can be reworked based on your new situation.
It is also possible to reduce your payments into an IVA, with the permission of your creditors. If it’s a genuine change in circumstances, this is agreed to in most cases. If for example you’re a shopkeeper, and you experience increased costs from your suppliers, it’s possible that you can make reduced payments.
In a non self-employed IVA, you cannot usually obtain credit of more than £500 without the permission of the Supervisor. In a self-employed IVA, it is more likely that you will be allowed further credit if you can afford the repayments and need the credit for a viable business. For example, if you’re a consultant and have to pay monthly expenses before being paid at the end of each month, it may be possible to have a small overdraft to allow you to pay these expense.
Is an IVA right for you?
You need an expert to look at your business and personal finances to decide if an IVA is a good option for you. Here at Payplan we have a specialist team dealing with self-employed IVAs. Another good place for advice is Business Debtline.