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.
What happens before, during and after an IVA?
Could PPI get you out of debt?
Choosing between an IVA and a DMP
Jgreen says
Good article let down by the company this is linked to that has its own problems including significant delays in responding to communications and issuing completion certificates – both of importance when dealing with someone who is self employed.
Most staff (including hmrc staff) fail to understand the practical issues with running your own business. Cash flow is one and there is a difference between what you earned last year and what you are actually bringing in now.
A lot of things are poorly explained by Iva companies and the theory does not match the practice.
An Iva can be a good alternative to bankruptcy but only if there is a good chance that the company you are running is clearly viable and you have a recovery plan.
JoeEasedale says
Most staff (including hmrc staff) fail to understand the practical issues with running your own business. Cash flow is one and there is a difference between what you earned last year and what you are actually bringing in now.
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Of course that is right, and as Personal IVA’s are vastly in the majority, not all staff coming across one are going to understand all the ramifications. That is why the IVA proposal needs to be crafted with care by the applicant. Is the business seasonal?, then seasonalise the repayment schedule for the first year and call for a similar exercise annually.
Anyone dealing with an SME knows that cashflow is an item, so build into the proposal a suitable percentage variation into the monthly repayments, after accounting for seasonality with a proviso that the annual repayment will not have a greater variation than X% and if in a shortfall can be made up by overpayments in future years or adding months on, on a pro rata basis at the proposed end of the IVA.
Where possible, once your proposal is crafted to your satisfaction, try to break up the last years figures to show the realism of your proposals.
A well crafted proposal by the person who knows the business best, when approved, will form part of your legally binding agreement , and whilst you might be queried if you exercise your right to send a reduced payment one month, you will be able to point to the agreement as justification.
JoeEasedale
Ryan says
I’ve 8k of credit cards and overdrafts and owe a lot of income tax and VAT oover 20k??? but haven’t filed tax returns for years do I need exact numbers owed when applying for an IVA? I dont think I have the details any more cant cope with papers living with my parents and dont own a car is bankrupt better?
Sara (Debt Camel) says
So you were self employed , this wasn’t a limited company? Is the business still going, if so do you think it is currently making a profit?
Ryan says
Self employed and the business has stopped when The guy I was working with didn’t want to carry on so I’ve got a job but it doesn’t pay a lot.
Ryan says
Actually I think the VAT alone may be 20k no idea what the tax will be. I really want this sorted.
Sara (Debt Camel) says
I was writing a separate article on this as it’s too long for a comment. But what you have just said changes my reply slightly. Briefly an IVA firm will want to have good estimates of all your debts before putting an IVA proposal forward. And if you think the tax owed is likely to be more than 24k – three times as much as your other debts – then HMRC would have a veto over any IVA even if you do get all your tax returns done before you apply. I can’t say if bankruptcy or an IVA is a good idea for you – I suggest you talk to Business Debtline about your full situation. But nothing you have said suggests to me that an IVA is the better option, and it may not even be possible.
Adam says
I went self employed last year and I had great credit, I had to set up my buisness at the wrong time as I was laid off from my full time job which was paying for the equipment, amongst other things I’ve ended up in around 40k worth of debt.
I’m managing to meet the mo they payments as the business is doing ok but every month is a massive struggle! It’s always down to the final week and I get the money!
Since I’ve gone self employed my credit has gone I can’t even get a balance transfer card and I’ve never missed a payment!
How will my credit improve because at the moment I honestly feel it’s better to take an Iva and the £1100 a month I was paying on debts can go in a savings account, obviously I will pay whatever the Iva is….. I just don’t see the point anymore as I’ve alre got rubbish credit from going self employed I may aswell take an Iva still have bad credit but be better if financially and it will lift a burden of my family’s shoulders!! I’m sick of thinking about it all the time
Sara (Debt Camel) says
You won’t be able to save in an IVA… all your “spare” income goes into the IVA.
I can’t tell why your credit has dropped. If it’s just because your cards are maxed out, then as you pay them off slowly your credit score will improve.
Lisa says
I am self employed and took out an IVA in August 2021. I am coming up to my annual review and preparing for that and my financial year ahead. Since I set up my IVA my self employed income has gone up, but so has my expenses. What I am wondering today is if you are allowed to save for a prudent reserve? This would be about 2-3 months of savings to cover ‘holiday pay’ or ‘sick pay’ or something else that came up which left me unable to work for some time but I would still be able to pay my expenses. Do you know if that is allowed if you have an IVA as a self employed person?
Sara (Debt Camel) says
This would have been a good question to ask before you started the IVA.
You certainly should be allowed to put aside money for increased taxes and for lower/no income for reasonable amounts of holiday. But you need to talk to your IVA firm about what a reasonable amount is. Sickness, I don’t know.
You also need to talk in August about how much your energy bills will be going up in October – at the moment it looks like about 25% but in August there should be a better estimate.
Lisa says
Thanks Sara for your reply. Yes I definitely should have asked that question before I started the IVA. I was in quite a muddled headspace and fearful of my debts and financial situation so I guess I wasn’t thinking clearly. I know that I am allowed to save £20 for general savings. I will ask in my review about being prepared for potential sickness or holiday/time off. Thanks for the tip about energy bills. I currently live with my parents but it would be good for me to contribute there if I can seeing as it’s going up so I will have to add that to my budget in August.
Sara (Debt Camel) says
You are living with your parents? Do you have any assets to protect in an IVA? How much are you paying a month?
Did you take debt advice from a proper adviser not an IVA firm before setting this up?
Lisa says
Yes I am for now. Though plan to move with my partner at the end of this year or early next year.
I don’t have assets.
I was paying £72 a month, now £59 a month and end of the year it will be £200 a month (that’s how it’s currently laid out but I know it can change after review)
I took verbal advice from the IVA firm only. Did a bit of online research also.
My partner and I are planning to get married next year too. I need to ask advice from IVA company about allowances to save for a (small) wedding.
Sara (Debt Camel) says
This IVA sounds like it may be a disaster. They want to you pay more, they won’t be happy with you having higher bills because you move out from your parents. And they won’t let you save up for a wedding.
If you have no assets to protect and also expected your home situation to change in the next few years then this IVA was almost certainly a very bad option when you started it. And you may have better options than continuing with it.
I suggest you talk now to Business Debtline https://www.businessdebtline.org/ about whether failing the IVA and going for a Debt Relief Order instead (either now or when you move in with partner) would be more suitable.