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Debt Advice Handbook 14th edition

3. Stages of debt advice

• Create trust
• List creditors and minimise debts
• Minimising debts because of COVID-19
• Minimise debts by ceasing to trade
• Minimise other debts
• List and maximise income
• COVID-19 help
• List expenditure
• Deal with priority debts
• Services
• Non-domestic rates
• Rent arrears
• Leased premises
• Other leases
• VAT debts
• Income tax debts
• Draw up a personal financial statement
• Choose a strategy for non-priority debts

This section highlights the factors to be taken into account in the debt advice process, as outlined in Chapter 3, when advising someone who either runs, or has run, her/his own business, whether as a sole trader, a partner or a company director.

Create trust

People who have run their own business may pose particular challenges to your trust-building skills. Being self-employed requires independence and self-confidence, which may make it difficult for a person to ask for help. If an employee becomes unable to pay her/his debts after being made redundant, at least s/he can see that the causes are beyond her/his control. However, someone whose indebtedness arises after the collapse of her/his own business may have to face feelings of personal failure in addition to the usual problems associated with serious debt. S/he may also have to consider the position of her/his employees.

You should also ensure that as much responsibility as possible for undertaking the tasks necessary to sort things out is carried by the businessperson. If s/he has already run a business (often for many years), s/he may feel both deskilled and disempowered if you take over simply because the business is no longer successful.

List creditors and minimise debts

• Minimising debts because of COVID-19
• Minimise debts by ceasing to trade
• Minimise other debts

Minimising debts because of COVID-19

Usual advice may not apply if the business cannot trade because of COVID-19 rules, the business person has coronavirus and/or is self-isolating under COVID-19 rules, or employees of the business have coronavirus and/or are self isolating under COVID-19 rules. In these cases, the business may be viable otherwise and a business financial statement may not be able to be drawn up because of the changing situation.

Specialist help should be sought from a small business adviser – eg, via Business Debtline. Listing creditors should still be undertaken as many business creditors have offered temporary forbearance because of COVID-19.

See later in this chapter for the forbearance given by different business debt type.

Minimise debts by ceasing to trade

Note: you should not attempt to advise a company on ceasing to trade. This is an area that requires specialist advice.

If a client is still running a business but is seriously in debt, s/he should consider whether or not to continue trading. There is no point in doing so if this is just increasing indebtedness and the situation is unlikely to change. In some cases, continuing to trade in this situation could become an offence at a later stage if the business is a limited company.

Note: From 1 March 2020 to 30 September 2020 and from 26 November 2020 to 30 June 2021, the rules for this type of offence were suspended by the government due to the COVID-19 pandemic to help company directors continue to trade during this period.

This is a highly complex area and specialist help should be sought from a small business adviser – eg, via Business Debtline or the business’s own accountants. The process may be helped by drawing up a business financial statement. It is usually recommended that this should be for a period of no longer than three months, unless the business is a seasonal one.

Do not attempt a business income and expenditure list for a limited company. In this case, the director of the limited company should obtain monthly drawings figures from the company’s accountant that can be used as income on a personal financial statement.

The business financial statement is similar to the personal financial statement drawn up for the client (see here), except that it deals with the income and outgoings of the business.

•All the business’s assets. This should include equipment or machinery with its approximate resale value. This will be different from amounts shown in professionally produced accounts, where the ’book value’ is based on the original cost of an item and its theoretical life. The greatest asset of a business may be the work it has in hand and the debts owed to it. These are difficult to value. The likelihood of a debt owed to the business being paid must be assessed and the contractual status of work in hand measured. For instance, a painter and decorator may have agreed in the autumn to paint the exterior of an existing customer’s house the following spring. If the customer loses her/his job during the winter, in the absence of any binding agreement the work may not materialise.

A realistic value for any premises or leases on premises that are owned should be estimated – eg, by a local estate agent. Note: valuations of business premises are not usually free of charge (as they are for domestic premises). The client’s estimate of value may therefore have to be sufficient. Business premises are particularly susceptible to a fall in value caused by developments elsewhere in the locality. For instance, the opening of a new supermarket could possibly cause a collapse in the business of a corner shop and potentially a fall in the value of its premises. In this way, a reduction in the market which causes a business to flounder can also reduce the value of its assets, which would otherwise have been its major protection from financial problems. Valuing a lease is complex and can only be accurately assessed by a professional. Leased business premises are not valued in the same way as domestic premises. The shorter the period that the lease has left to run, the less likely it is to be of any value. Note: if there is no one prepared to take over the lease, this might represent a liability rather than an asset (because the client/tenant remains liable for the rent until the lease expires).

Items like cars should always be valued at the price likely to be obtained at auction rather than a price an optimist might expect to get from a private sale. There are various used car price guides available online and from newsagents that give a trade price for reasonably modern cars, and these can be used as a guide.

•Likely income to the business. If the client is using a business financial statement to help forecast the future viability of the business, it may help to draw up a list of payments that the business might expect to receive based on a conservative, but realistic, assessment. Note the dates when payments can be expected.
•Expenditure by the business. A similar, dated list of payments that the business is required to make must be drawn up next. This must include, for example, bank interest and charges, lease or rental charges for both property and equipment, regular bills for fuel and other services (eg, telephones and waste disposal), payments required by suppliers, VAT payments, wages to any staff, and estimated tax and national insurance (NI). Some expenditure can be split between business and personal use – eg, travel costs. You should have some knowledge of how to complete a business financial statement in order to do this – it may be appropriate to refer the client to a specialist adviser.

The excess income over expenditure gives a rough idea of how much is available for the businessperson to pay her/himself in ’drawings’. If there is no foreseeable likelihood of anything being available, this indicates that trading may need to come to an end. However, the client must obtain expert assistance before taking such a major step, because items like liability for tax or payments due under a lease, which can be very complex, could make the difference between viability and insolvency. A lay adviser is not generally qualified to make this decision.

If a client is trading as a partner, the decision to cease trading may not be hers/his alone. If one partner wants to cease trading but others do not, s/he should ensure that s/he has formally severed her/his partnership agreement in order to limit her/his liability to those debts that have accrued at that time. S/he should try to gain the agreement of creditors and ex-partners, preferably in writing, that s/he is not liable for any debts which subsequently come to light and which relate to the period of her/his membership of the partnership. If a partnership is informal and there is, therefore, no prescribed way of leaving it, legal advice should be sought so that an agreement can be drawn up to terminate it. If possible, this should include an agreement that those remaining in the business will ’indemnify’ (ie, agree to pay instead of) those leaving against claims against them for past actions (or bills).

Sometimes, informal business partnerships exist between people who have personal relationships, such as married or cohabiting couples. It is often the custom that either party can enter into contracts on behalf of the partnership (for which both partners become jointly and severely liable). In such a case, it is important that suppliers are informed that the partnership no longer exists, if this is desired – eg, if a personal relationship ends and so a couple cease trading together.

Minimise other debts

Business borrowings are often secured by banks against a person’s home.

Sometimes such security is not enforceable if the agreement was entered into as a result of undue influence or misrepresentation by the creditor or another client (see here and here). This commonly occurs if a person who is not the borrower is required to agree to a charge being made on a property in which s/he is either a joint owner or has another interest (perhaps because s/he lives with the owner). In one case, it was decided that a charge was not enforceable where a client’s wife had signed it but had not been recommended to take separate legal advice and had been told that her husband’s business would be closed down by the bank if she did not do so.

If undue influence or other wrongdoing occurred at the time the security was signed, specialist or legal advice should be obtained, as the law is complex in this area.

The debts owed by a person who has run a business may include tax debts. See below for ways in which these might be minimised.

List and maximise income

The scope for improving the income of a person running her/his own business is often greater than that of an employee. Specialist business advice can improve profitability, for instance, through better marketing, reducing production costs or overheads, or diversification. You should, therefore, refer the client to someone who can help with this.

In addition, there are many grants and other facilities (eg, cheap loans) available to small businesses, which should be investigated. Information can be obtained from gov.uk/business-finance-support. The payment of tax may use up a substantial proportion of income and, therefore, all the relevant individual tax allowances, reliefs and expenses that a business can offset against tax should be claimed. Consider asking the client to consult an accountant, as this can be a complex area.

Self-employed people may be able to claim universal credit (UC). The claim is assessed on a monthly period so there is no need for a projection apart from when the claimant is in her/his first assessed month. They may also be able to claim council tax reduction and disability benefits. If they do not come under the UC system, they may be able to claim housing benefit, income-based jobseeker’s allowance or income support. If NI payments are up to date, it may be possible for a self-employed client to claim employment and support allowance if s/he is unable to work because of sickness.

COVID-19 help

The government and, in some cases, private lenders have introduced a number of measures to help a business person through financial difficulties because of COVID-19.

Sole traders and partnerships

From July, sole traders and partners in a partnership can apply for the fifth grant of the Self-Employment Income Support Scheme (SEISS). This will cover the period May 2021 to September 2021. This grant will pay:

•80 per cent of three months’ average trading profits of up to a maximum of £7,500, if there is a 30 per cent or more reduction in turnover due to COVID-19; or
•30 per cent of three months’ average trading profits up to a maximum of £2,850, if there is a 30 per cent or more reduction in turnover due to COVID-19.

Directors of limited companies

The coronavirus job retention scheme is still open and available for limited companies and LLP’s that have employees. There are different amounts and caps on amounts that can be claimed for furloughed employees depending on when the claim is made and how long the claim is for. See gov.uk for more details.

Statutory sick pay refunds

Businesses with fewer than 250 employees can apply for a refund of any statutory sick pay they have paid up to a maximum of 14 days if the employee is off sick with coronavirus. That includes directors of limited companies.

Recovery Loan Scheme

Until 31 December 2021, businesses may be able to apply for government-backed finance to help business recover from the impact of COVID-19. Finance includes:

•loans and overdrafts of between £25,001 and £10 million per business; and
•invoice finance and asset finance of between £1,000 and £10 million per business.

For more information and eligibility conditions, see gov.uk.

Benefit income

Sole traders and partners in a partnership will not be eligible for statutory sick pay. Instead, if they are unwell with coronavirus or self-isolating, they can apply for new style employment and support allowance, which can be claimed from day one. Universal credit can also be claimed by people who are well but unable to work. The minimum income floor rules have been changed for self-employed people, and face-to-face interviews are not taking place. Clients should call the universal credit helpline for more information.

List expenditure

When drawing up a financial statement for a businessperson, you need figures from the business financial statement.

The personal financial statement is a different document and should be kept separate. The expenditure required by the business (even of a sole trader) should be listed separately from personal or household expenses. Sometimes this is not easy, particularly with a sole trader – eg, a car might be needed for work and to provide family transport. Send the business financial statement along with a personal financial statement to creditors.

Be careful not to double count items shown as outgoings on the business financial statement (and, therefore, reduce the available income), but which may also be paid as part of the household outgoings. For example, if a car is used for both domestic and business purposes, it should be apportioned partly to the business account before the drawings from the business are shown, and then only the remaining (domestic) portion should be shown on the personal financial statement.

Deal with priority debts

• Services
• Non-domestic rates
• Rent arrears
• Leased premises
• Other leases
• VAT debts
• Income tax debts

Services

If a business has ceased trading and utility debts on commercial premises are outstanding, the gas and electricity bills may need to be treated as a priority. This is because energy suppliers can disconnect home premises for non-payment of commercial bills if the supplies are in the same name and provided by the same supplier. If someone has been trading from home, therefore, gas and electricity arrears are priority debts. If s/he traded from part of the same building (eg, she ran a shop and lives in a flat above it), s/he should separate the supply to the two premises before arrears accrue to avoid the risk of disconnection of the domestic premises.

Water companies cannot disconnect the supply to residential premises and can only disconnect a supply to the premises to which the water was supplied. It is not entirely clear how this affects mixed-use premises. Ofwat has issued guidance stating it believes the disconnection of mixed-use premises could be illegal and reminds customers of their right to take court action if this happens. In practice, companies rarely disconnect mixed-use premises.

Water companies can disconnect separate non-domestic premises. The environmental risk of a business being without water could lead to its closure.

Non-domestic rates

Non-domestic rates (business rates) are sometimes not charged on empty premises, but this may vary between local authorities, so you may wish to check local discounts. If the ratepayer has a lease on the premises, s/he is liable for the business rates for as long as her/his tenancy exists, even if the premises are empty.

Non-domestic rates are collected and enforced in the same way as council tax (see here), except that, for instance, tools of the trade are not exempt. This means that bailiffs can take control of a ratepayer’s property from anywhere (including her/his home address) once a liability order has been made. Another difference is that attachment of earnings orders and charging orders are not allowed for business rates, nor are deductions from benefits.

In practice, local authorities may remit, or write off, large amounts of unpaid non-domestic rates. They have the power to remit unpaid business rates if there is ’severe hardship’ and if it is reasonable to do so. In practice, most local authorities use this power to write off unpaid rates if a business has ceased trading and those responsible for the rates depend on benefits, or if a business could close (with job losses) if rates were to be pursued. Local councillors should be approached to put pressure on officers if this is not done.

Non-domestic rates and COVID-19

Local authorities can offer a range of help for businesses that have had to stop trading during COVID-19. Business rates in England were not payable for 12 months from 1 April 2020 for retail, leisure and hospitality businesses and qualifying nursery businesses. That also applies to business in Wales with a rateable value of £500,000 or below.

Those businesses are also being given 100 per cent business rates relief from 1 April 2021 to 30 June 2021. That also applies to business in Wales with a rateable value of £500,000 or below. In England there will also be 66 per cent business rates relief given from 1 July 2021 to 31 March 2022. Clients should contact their local authority to find out if they qualify.

Local authorities in England and Wales are offering a range of grants. Eligibility and the amount depends size of business, type of business and, in Wales, rateable value of the business. Clients should contact their local authority for more information.

Rent arrears

Recovery of commercial rent arrears is possible as soon as seven days’ rent is overdue. No court order is necessary. If a client is continuing to trade, it is probably impossible to stop bailiffs (who act on behalf of the landlord) from making a peaceful entry to her/his premises (since they are likely to be open to the public). Some landlords regard taking control of the whole of a business’s stock as the easiest way of recovering rent arrears, but this will usually force the client to cease trading. Priority must be given to securing an arrangement with a business’s landlord if the client wishes to continue trading. The bailiff cannot take control of goods at the client’s home address (unless s/he has taken goods there to avoid them being taken by the bailiffs).

See here for more information about bailiffs and commercial rent arrears.

Recovery of rent arrears and COVID-19

In England and Wales from 26 March 2020 until 30 June 2021, business landlords were unable to end a business lease and take the premises back because of rent arrears.

There are also temporary COVID-19 changes in place about how much rent is unpaid and how much notice must be given before landlords can use bailiffs. Your client should seek specialist advice if s/he owes commercial rent arrears and the landlord is threatening the use of bailiffs.

Leased premises

Many businesses lease their work premises. In some cases, the unexpired part of a business lease can be a valuable asset that can be realised if the client decides to cease trading or trade from other premises. Professional advice should always be sought on the valuation of such leases. If a lease is to be ’assigned’ to another person, legal advice should be sought. The permission of the landlord is required. In certain circumstances, if the new tenant fails to pay her/his rent, the earlier tenant can still be held responsible. In order to protect against this future liability, it is sometimes better to agree to surrender a lease, even if it may be sellable for a premium.

A landlord may be prepared to accept the surrender of a lease (which ends the tenant’s contractual obligations, such as rent and therefore business rates) if it is clear that s/he is unlikely to get any more money from a particular tenant. If s/he wishes to sue for unpaid rent, a landlord must be able to show that s/he has mitigated the loss. If a client has ceased trading and is likely to remain unemployed for some time, and has responsibility for a lease, you could approach the landlord directly. Explain that the client is unlikely to meet her/his contractual obligations and, in some cases, landlords agree to a surrender. You should ensure that you are not dealing with a lease which is of value (perhaps because it forms a small part of a redevelopment site or because the rent has been fixed at a low rate for many future years) before the client gives it away. Specialist advice should be obtained.

Other leases

Many businesses have equipment like photocopiers, electronic scales or games machines which are held on a lease. First check whether or not the lease is a regulated agreement under the Consumer Credit Act 1974 (see here). Many lease documents are complex and specialist help may be required.

A business lease runs for a number of years, during which time the owner of the goods (which may be a finance company) simply charges the rent to use them. At the end of the period, there is no automatic transfer of the goods to the lessee but, in practice, items are often not taken back by lessors. A lease usually contains provision for early settlement. However, in many cases, this figure is likely to be almost as high (usually 95 per cent) as continuing to pay rent until the end of the lease period.

Once a lessee is in arrears with the rent, however, the courts can intervene under common law and alter any clause designed to penalise a lessee who is in arrears. Because the courts have this power only when arrears arise, it may be useful to allow business leases to fall into arrears if a client has decided to cease trading.

Business leases are complex and, as the sums of money involved can be substantial, expert advice should always be obtained before reaching any agreement with a lessor about early settlement. Trading standards departments may be able to provide such advice.

In calculating the amount that should be paid by the client who is in arrears, the courts ensure that the lessor receives only the amount of money that it has lost as a result of the termination. This should include either the goods or their full value at the time of termination. In addition, lessors should receive the amount that would have been paid in interest less an amount (usually 5 per cent a year) in recognition of the fact that they are receiving this money early. If a lease contains service charges for the leased equipment, the courts may reduce the future service charges that will not be required after the goods are returned.

VAT debts

VAT is a tax on the increase in the value of most goods or services (some are exempt) between the time they are bought by a business and when they are sold. Businesses with a turnover of less than £85,000 a year (2021/22) do not have to register for VAT. All others have to submit returns at a frequency agreed with HM Revenue and Customs (HMRC) to show the difference between the VAT they pay to other suppliers (input tax) and the VAT they charge their customers (output tax). Most businesses are legally required to submit their VAT returns online and pay electronically. If they have collected more VAT than they have paid, they must enclose this with their return and submit it by a due date (usually a month after the end of the relevant quarter). If a return is late, the amount due is increased by an automatic penalty. If a return is not made, HMRC can estimate the amount due and issue its own assessment, which becomes payable immediately.

Local HMRC officers who collect VAT vary greatly in their approach to struggling or failed businesses. In general, they consider themselves to be collectors of a tax which has already been paid by a third party to the client and of which the client is only a custodian. While this may bear little relation to the realities of running a small business, this attitude means they are assertive and swift in their recovery process.

Once payment is outstanding, the HMRC officer at a local office usually uses the threat of bailiff action to take control of goods to force payment. This may initially consist of a visit, phone call or letter to state that bailiff action will be used. An enforcement notice giving seven clear days before action will then warn that immediate payment is required and bailiffs will be used in default.

A warrant to take control of goods is then signed by an HMRC officer. A court order is not needed.

The warrant is usually used by a firm of private bailiffs with an HMRC officer in attendance. HMRC can obtain a warrant to force initial entry, but this is very rare. However, most business premises are accessible to the public (including bailiffs)

and therefore negotiation is essential. A client who is still trading should always try to give the bailiffs some money and treat this debt with utmost priority. Taking control of goods can provoke or escalate the collapse of a business, both by removing necessary stock or equipment and also by reducing confidence in it.

If you have a client with unpaid VAT, you should:

•contact HMRC, explain the position and request a short time to organise the client’s affairs;
•get an accountant to check the amount claimed, particularly if it is an assessed amount;
•explain the seriousness to the client. Use a small business adviser if necessary to look at the viability of the business – eg, its credit control procedures.

See Chapter 14 for details of how to deal with bailiffs. Note the detailed list of exempt goods.

Where taking control of the client’s goods is not appropriate, HMRC often uses bankruptcy as a means of collection (see Chapter 15).

Income tax debts

Self-employed people and businesses are responsible for making a return to HMRC, on which tax bills are based. Under the self-assessment system, taxpayers calculate their own tax and send a payment to accompany their return for a particular year. A small business should always get specialist help in claiming all the allowances against tax to which it may be entitled, and in treating its profits and losses in the most tax-efficient way. The tax bill is based on simple ‘three-line accounts’ for small businesses with a turnover of less than £85,000 a year. These are required to show:

•total turnover;
•total expenses and costs of purchases;
•net profit (gross profit, less all the business expenses).

In addition to the tax due on its profits, a business may also owe tax (and national insurance contributions) on wages paid to employees.

The assessment process is outside the scope of this Handbook and you should, if necessary, get specialist help to check the amount of tax demanded. TaxAid is a useful source of help (see Appendix 1).

If the client fails to file a tax return, HMRC makes its own ’determination’ of how much tax is due and this is enforceable immediately. It can only be overturned by filing a return. HMRC can impose penalties for late filing of returns and/or non-payment of tax. If there is no tax to pay when the return is filed, the penalty is not reduced and is therefore still payable by the client. S/he can appeal the penalty on the grounds that s/he had a ’reasonable excuse’ for the failure. It is still important to file returns, however late, as HMRC has a policy that payment arrangements are not accepted until returns are up to date.

If a tax bill is unpaid, HMRC may:

•use a debt collection agency;
•take control of goods – ie, use bailiff action without a court order (see Chapter 14);
•use the magistrates’ court (see Chapter 13);
•use the county court and follow the judgment with a third-party debt order, attachment of earnings order, information order, charging order or instalment order (see Chapter 11);
•seek a bankruptcy order (see here).

As with VAT, HMRC is likely to be particularly strict if the money owed includes tax already collected by a business from employees and not passed on to it. Note: it will still consider starting bankruptcy proceedings, even if this is unlikely to lead to a payment being made.

A summons to the magistrates’ court is usually used to collect unpaid tax of up to £2,000 if the debt is less than 12 months old. The client is summonsed to appear at a hearing at which the magistrates make an order that s/he pay the tax. The client should attend the hearing with a financial statement and ask to pay the tax by instalments. The courts cannot consider arguments that the tax is not owed or the wrong amount is being claimed. If the client still does not pay, the magistrates may summons her/him to a committal hearing. At this, the client will need to show that s/he has not ’wilfully refused’ or ’culpably neglected’ to pay this tax (see here). However, HMRC rarely uses this method of enforcement.

If the county court is used, the client can ask for an instalment order in the usual way.

If the client owes HMRC at least £1,000, it can ask her/his bank whether there is any money it can take to pay this debt. Usually, the first £5,000 in an account is protected. A client must be aware that if s/he has a lump sum of money to offer various creditors, HMRC could access this in her/his bank account and can do so without a court order.

HMRC is entitled to claim interest (2.60 per cent a year) on any unpaid tax until payment, and enforces this even after a county court judgment. Once a judgment has been made, the possibility of an administration order exists if the debts are below £5,000 (see here).

It is possible to negotiate with HMRC. Although it is generally easier to negotiate after the client has ceased trading, as with all negotiation, the outcome depends on the circumstances of each individual case. If the taxpayer has been caused problems by maladministration, the Parliamentary and Health Service Ombudsman can be contacted via her/his local MP. There is also an adjudicator at HMRC, who may intervene in cases of particular hardship or unreasonableness, and appeals can be made to HMRC in cases where the wrong amount of tax is being charged.

Income tax debt and COVID-19

HMRC are giving businesses longer to pay self-assessment payments that are due on 31 July 2020. They are also pausing the majority of bankruptcy and winding up petitions for unpaid income tax. These deferred payments, along with up to £30,000 of self assessment tax due on 31 January 2021, can be paid by installments. See gov.uk for eligibility criteria and how to contact HMRC.

Draw up a personal financial statement

Creating a personal financial statement for a client who is running her/his own business is no different from that of an employed person, except that expenses may need apportioning and the amount of her/his income may be less predictable. Both these things should be made clear on the personal financial statement.

The figure for earnings (‘drawings’) net of tax and NI contributions should be taken from the business financial statement produced to help decide the viability of the business. It is important that the business budget is used to extract a figure for drawings, rather than asking a client how much s/he draws from the business. The client’s drawings may well exceed profits. If this is the case, specialist advice should be obtained. If the client is a director of a limited company, the accountant should be approached to obtain a monthly drawings figure, which can be used as income on the personal financial statement.

Choose a strategy for non-priority debts

Bankruptcy and individual voluntary arrangements are discussed in Chapter 15. Bankruptcy may often be the most satisfactory way out of the large debts that can arise after the failure of a business. Bankruptcy, in itself, does not necessarily mean the business must cease trading, particularly if there are no assets of significant value. However, remember that although discharge from bankruptcy may occur after one year, a person’s credit rating will be affected for considerably longer and, if s/he wishes to run a business that will require credit in the future, bankruptcy can be an obstacle to this. Someone with an otherwise viable business but serious debts may be better advised to consider an individual voluntary arrangement.