3. Stages of debt advice

CPAG

3. Stages of debt advice

This section highlights factors to consider in the debt advice process, as outlined in Chapter 3, when advising a client who is either running, or has previously run, her/his own business as a sole trader, a partner in a business partnership or as a director of a limited company.

Create trust

Self-employed clients may pose extra challenges for advisers in this area.

Being self-employed often requires independence and self-confidence. This can sometimes make it more difficult for a self-employed client to ask for help because s/he is usually the person who sorts out any problems. Self-employed clients are often emotionally, as well as financially, invested in their business. If the business is struggling, some clients may feel a sense of personal failure. That is in addition to the usual problems that clients face when dealing with serious debt and can make asking for and accepting help more difficult.

Some self-employed clients may also feel protective of their business and reluctant to share information about the business or its debts. Explain that you are asking for this information to make sure that the client gets the advice s/he needs. That helps the client to get the best outcome for dealing with her/his situation and to protect his/her business when possible.

Make sure that a self-employed client is given the appropriate level of responsibility for carrying out tasks needed to deal with her/his situation. Be aware that some self-employed clients may feel deskilled and disempowered if an adviser takes over simply because they, or their business, is in financial difficulty.

List creditors and minimise debts

List creditors

Consider the client’s overall situation. Gather information about any personal and business debts for which the client is liable. If the client is a director of a limited company, check whether the client has given any personal guarantees for any limited company debts and whether any guarantees have been called in.

Minimise debts because of COVID

Usual advice may not apply if the business cannot trade because:

•of temporary COVID rules;

•the self-employed client has coronavirus or is self-isolating under COVID rules; or

•employees of the business have coronavirus or are self-isolating under COVID rules.

In these cases, the business may otherwise be viable. For these and other clients, the changing situation may also mean that it is not possible to complete a business financial statement. Specialist help should be sought from a small business adviser, such as Business Debtline.

A list of creditors should still be prepared because some business creditors have offered temporary forbearance because of the problems caused by COVID.

See here for the forbearance given by different business debt types.

Minimise debts by ceasing to trade

You should not attempt to advise a limited company (or limited liability partnership) on ceasing to trade. That is an area that requires specialist advice.

If a client is running a business but is seriously in debt, s/he should consider whether to continue trading. The client needs to consider whether the business can improve its situation and trade out of its financial difficulties or, if the situation is unlikely to change, will trading on just increase indebtedness.

If the business is a limited company, continuing to trade when there is no realistic chance that the insolvent company can trade out of its difficulties could be deemed an offence at a later stage.

Deciding whether to trade on is a complex area and specialist help should always be sought from a specialist business adviser, such as Business Debtline or the business’s bookkeeper or accountant.

To help with the process, you can assist the client in drawing up a business financial statement. The business financial statement (see page here) is similar to the personal financial statement drawn up for the client except that it deals with the income and outgoings of the business.

If the business financial statement shows that nothing is available for the client to take as an income from the business, and that is unlikely to change, this usually indicates that trading needs to stop. However, the client must obtain specialist advice before taking such a major step. This is because several issues, such as liability for tax or payments due under a business lease, could make the difference between viability and insolvency.

Self-employed clients also need to look at any assets that are available to the business and consider how this affects the business’s viability. The types of assets that a business has varies from business to business. You can help the client to prepare a list of assets by examining her/his individual circumstances.

Consider the approximate resale value of equipment or machinery. This amount will be different from amounts shown in professionally produced accounts, where the ‘book value’ may be based on the original cost of an item and its theoretical life.

Check if the business has work in hand and consider the contractual status of any agreement. 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 their job during the winter, in the absence of any binding agreement, the work may not go ahead.

Check if the business has any debts owed to it and assess the likelihood of the business being paid. Draw up a list of payments that the business expects to receive. Consider signposting the client to specialist business advice on recovering monies that are owed to the business.

A realistic value for any business premises that are owned should be sought. Ideally, this should be done by a specialist, such as a local estate agent. However, because there is likely to be a fee for the valuation of business premises, a client’s estimate of value may have to be accepted in some cases. Business premises are particularly susceptible to a fall in value caused by developments in the local area. For instance, the opening of a new supermarket could cause the collapse of a local general store (due to reduced trade) and a corresponding fall in the value of the business premises. Circumstances outside of the business’s control can reduce the value of its assets and the protection that the assets would otherwise have provided from financial problems.

Valuing a lease for business premises 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. Also, if there is no one prepared to take over the lease, that might create a liability rather than an asset because the tenant remains liable for the rent until the lease expires. Also, the client may remain liable for rent payments under the lease even when s/he has arranged for the lease to be ‘assigned’ to someone else, if that person fails to pay.

Items like cars and vans should 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 vans – eg, parkers.co.uk. These can be used as a guide.

If a client is trading as a partner in a business partnership

This section gives an overview of issues to consider if a partner in a business partnership wants to cease trading. This is a complex area of advice. Clients should be signposted to specialist advice to help make sure that they do all they can to limit their personal liability for any partnership debts.

The decision to stop trading may not rest solely with the client if s/he is a partner in a business partnership. If the client wants to stop trading but the other partners do not, the client should make sure that s/he formally ends (severs) any written partnership agreement. This will help to limit the client’s liability for partnership debts to those that accrued during the period s/he was a partner.

If a partnership has been set up informally and there is no partnership agreement in place to set out how the client can leave, the Partnership Act 1890 applies. The client should seek legal advice so that an agreement can be drawn up to end her/his links to the partnership.

A client should also seek legal advice to see if there are any viable ways to limit her/his liability for the partnership’s debts and protect her/himself from future claims. For example, a client could ask the partnership creditors and the remaining partners if they will agree in writing that the client is not liable for any debts that subsequently come to light and relate to the period the client was a partner.

A client who wants to leave a business partnership should also give the partnership’s creditors notice that s/he has left the partnership. The client’s name should be removed from the partnership’s paperwork.

Sometimes, informal business partnerships exist between people who have personal relationships, such as married or cohabiting couples. In these cases, the ending of the personal relationship can prompt a need to end the business partnership. In the absence of a written partnership agreement, either party can usually enter into contracts on behalf of the partnership, for which both partners are jointly and severally liable. Although the same advice applies to these clients, it should be recognised that the couple’s previous relationship may complicate matters. In some cases, it may also limit the amount of information that is available to the client. This is often the case when one partner has made most of the business decisions and the other partner sees her/himself as a ‘sleeping partner’. The sleeping partner may be unaware of her/his joint and several liability for the partnership debts.

Minimise other debts

Business borrowings may be secured by banks against a person’s home.

Sometimes the 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 may occur if a person, who is not the borrower, is asked to agree to a charge being made on a property that s/he either jointly owns or has an interest in (perhaps because s/he lives with the owner). In one case, it was decided that a charge was not enforceable when 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.1Royal Bank of Scotland v Etridge [2001] UKHL 44; [2002] HLR 4 The law is complex in this area. If undue influence or other wrongdoing occurred at the time the security was signed, specialist or legal advice should be obtained.

The debts owed by a self-employed person may include tax debts. If a client is unsure whether s/he has taken into account all the allowances available to her/him personally and to the business, signpost to an accountant or bookkeeper for specialist advice. You will also need to refer the client for specialist help, for example from TaxAid, if they have failed to submit tax returns.

1 Royal Bank of Scotland v Etridge [2001] UKHL 44; [2002] HLR 4 »

List business income and expenditure

In addition to the personal financial statement, a business financial statement is also needed to assess the position of self-employed clients who are sole traders or partners in a business partnership. See page here for information about the types of business financial statement available and for dealing with other types of self-employed clients.

The business financial statement uses information about how the client’s business has performed in recent months to estimate what income the client is likely to get from the business in the future. The statement takes information about the business’s income and expenditure (running costs) over a set period to work out an average of the profit or loss that the business produced during this time. This information is used to estimate the amount that a self-employed client can expect to take from her/his business as income, after allowing for income tax and national insurance (NI) liability. The net business income figure (or loss) should be included in the client’s personal financial statement.

Business income

Only income for the business should be included in the business financial statement. Personal income, such as benefit income or employed income, is covered in the personal financial statement. Unless the client’s business is seasonal, you usually need details of the income received by the business during the last three months. This should be based on actual payments received by the business (not on invoices issued by the business). The income figure should not include an amount due for work that the business has completed unless payment for the work has been received.

If the client’s business is seasonal, a longer analysis of business income may be needed (up to a maximum of the last 12 months). You need to explore how a client’s business usually fluctuates to decide what period of time the business financial statement should cover. Specialist advice may be needed.

You should also check whether the self-employed client’s business has received any COVID-related government payments to cover business income reductions caused by the pandemic. This could be a payment from a local authority discretionary scheme, such as the Additional Restrictions Grant for clients based in England. This type of payment will need to be listed, but you should be aware that any one-off payments could distort what the financial statement shows as available to the client. Specialist advice is usually needed in this situation.

Business expenditure

Look at the business’s expenditure figures (running costs) for the same period of time that has been chosen to assess the client’s business income.

Make sure that you include all relevant expenditure for the business, for example, banking facility and overdraft charges, lease or rental charges (for property and equipment), utility bills (including telephones and waste disposal), payments to suppliers, VAT payments, staff costs (including wages and employers’ costs) and accountancy fees. Only include expenditure for the business in the business financial statement. The client’s personal and household costs are covered by the personal financial statement.

Be careful not to double count expenses that are shared by the business and the client personally - eg, electricity costs for a sole trader client who trades from home or travel costs for a client who uses a single vehicle for business and personal transport. Double counting (when the full cost, or part of the cost, is added to both the business and personal financial statement) reduces the client’s available income and creates an inaccurate assessment of her/his financial position.

Shared expenses need to be divided between the client’s business and personal statements based on the client’s individual circumstances. A client needs to work out how much of the cost covers business use and add this proportion to the business financial statement. The remainder of the cost should be included in the personal financial statement. Sometimes, it can be difficult to separate shared costs. Useful advice is available to help work out how much of the client’s shared costs should be included in the business statement at . Signpost the client to specialist advice if needed.

Maximise income

The scope for improving the income of a person running her/his own business can be greater than that of an employee. Specialist business advice can improve profitability, for example, through better marketing, reducing production costs and overheads or by diversification. Check whether there are any specialists that can help the client in this area.

In addition, there may be grants and other facilities, such as low-interest loans, available to small businesses. More information can be found at .

The payment of tax may use up a substantial proportion of income for self-employed clients. Make sure that all relevant individual tax allowances, reliefs and expenses that a business can offset against tax are being claimed. You can also signpost clients to a useful tool at to check whether simplfied expenses could save the business tax. Since this can be a complex area, the client may need to speak to their bookkeeper or accountant.

Business rates can be a major expense for clients who have a business lease. Check for any exemptions or discounts with the local authority. Information is also available at gov.uk and businesswales.gov.wales.

Some self-employed people miss out on benefits because they incorrectly assume that they are not entitled to claim benefits because s/he is in business. Self-employed clients may be able to claim universal credit (UC). Minimum income floor rules usually apply unless the business is in a start-up period. A UC claim is assessed on a monthly period so there is no need for a projection apart from when the claimant is in his/her first assessed month. A self-employed client may also be able to claim council tax reduction, council tax discounts and disability benefits. If s/he does not come under the UC system, a self-employed client may be able to claim housing benefit, income-based jobseeker’s allowance or income support. If the relevant NI payments are up to date and the client is unable to work because of sickness, s/he may be able to claim employment and support allowance.

Since a self-employed client’s income can be prone to fluctuations and eligibility rules vary among benefits, it is likely that a client will benefit from specialist welfare benefits advice. The Turn2us website, , provides a personalised benefits check that caters for self-employed clients.

COVID help

The government and, in some cases, private lenders have introduced measures to help self-employed clients and small businesses deal with the financial difficulties caused by COVID and the temporary rules imposed. In addition to the following schemes, information for COVID-related help with specific debts is included in the priority debt information (see page here onwards).

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) for an employee who is off sick because of COVID. This includes directors of limited companies.

This initial support ended on 30 September 2021, but the government has introduced a further scheme. Under the new scheme, claims can be made for eligible periods of COVID-related sickness on or after 21 December 2021. Claims can be made until 24 March 2022.

Recovery Loan Scheme

Until 30 June 2022, businesses may be able to apply for government-backed finance to help business recover from the impact of COVID. From 1 January 2022, finance includes:

•loans and overdrafts of between £25,001 and £2 million per business; and

•invoice finance and asset finance of between £1,000 and £2 million per business.

For more information and eligibility conditions, see .

Additional Restrictions Grant

Local authorities in England have been given funding by the government to help businesses affected by the omicron variant of COVID. Local authorities can decide which businesses to help, and payments must be made from the fund no later than 31 March 2022. Self-employed clients should be advised to check their local authority’s website to see if they are eligible for help.

Draw up a financial statement for a self-employed client

Creating a personal financial statement for a client who is running her/his own business is generally similar to that of an employed person, except that expenses may need apportioning and the amount of income may be less predictable. Both these things should be made clear on the personal financial statement.

How to calculate the amount of income that a client can take from the business depends upon the client’s trading status and any special rules that may apply to the type of business that the client carries out.

Sole traders and partners in a business partnership

For sole traders and partners in a business partnership, a business financial statement is required to calculate the income (drawings) that the client can take from the business. The business financial statement forms part of the overall assessment of the client’s financial position. It uses information about how the client’s business has performed in recent months to estimate what income (net of income tax and NI) the client is likely to get from the business in the future.

It is important to complete a business financial statement if needed, and not to simply use the amount that a client says the business can pay her/him. This helps to provide a more accurate view of how the business is performing. It also protects against a client giving figures that are based on what s/he would like her/his business to be able to provide, rather than what the business can afford to pay.

It is not unusual for a client who is struggling to pay her/his debts to be surprised at the drawings figure produced by a business financial statement. Some clients may need time to digest this information and assess how this affects what they do next. If a client’s business is unable to provide any drawings or is running at a loss, specialist advice is needed. Specialist debt advice organisations can provide templates for a business financial statement. The Business Debtline website provides interactive statements for both sole traders and partners of a business partnership. Both statements can be saved and printed by the client. It is important that the correct business financial statement is selected based on the client’s trading status. That is because for a partner in a business partnership, the statement needs to look at how the business is performing and calculate the client’s own share of any business profit or loss.

Consider any special tax rules that may apply

When dealing with clients who are sole traders or partners in a business partnership, you should always consider how any special tax rules affect the business financial statement they are using. This commonly affects clients who receive a self-employed income as a foster carer, from letting residential property or who are covered by the Construction Industry Scheme. You need to check that the business financial statement you are using takes account of any special tax rules that apply. If not, a signpost to specialist help is usually needed.

Directors of a limited company

Do not attempt a business financial statement for a limited company. The director of the limited company should obtain monthly drawings figures from the company’s bookkeeper or accountant. These figures can be used as income on a personal financial statement.

Check that the figure provided by the client is net of any tax liability.

Deal with priority debts

This section gives information about common business priority debts. It is important to look at a client’s individual circumstances when deciding how to classify her/his business debts. In some cases, a debt that is usually considered a non-priority debt may be essential to the running of a business. For example, if an unsecured overdraft is used as cash flow for a business and there is no alternative credit available, the overdraft facility may need to be treated as a priority. Seek specialist advice if you are uncertain how to classify a business debt.

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.1Sch 6 para 1(6) EA 1989; Sch 2B para 7(1) and (3) GA 1986 If a client is trading from home (or was previously and still has the same supplier), gas and electricity arrears are priority debts. Clients with a commercial energy contract have less protection than domestic customers. If a client trades from part of the same building that s/he lives in (for example, s/he runs a shop and lives in a flat above the premises), if possible 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.2s1 and Sch 1 Water Industry Act 1999 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 the supply to a separate non-domestic premises. The environmental risk of a business being without water could lead to its closure.

1 Sch 6 para 1(6) EA 1989; Sch 2B para 7(1) and (3) GA 1986 »

2 s1 and Sch 1 Water Industry Act 1999 »

Non-domestic rates (business rates)

If the client has a lease for a business premises, s/he is liable for the business rates for as long as the lease exists. This applies even if the premises are empty, although there are some time-limited exemptions. Check for any exemptions with the local authority.

Non-domestic rates are collected and enforced in a similar way as council tax (see here), except that, for instance, tools of the trade are not exempt. This means that enforcement agents (bailiffs) can take control of a client’s property (including at her/his home address) once a liability order has been made. Another difference is that attachment of earnings orders and deductions from benefits are not allowed for business rates. Charging orders are not allowed if the local authority has already obtained a liability order for the business rates debt.

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. Some 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. If an application for remittance is declined, ask a local councillor to support the request.1s49 LGFA 1988

1 s49 LGFA 1988 »

Non-domestic rates and COVID

A range of help has been available from local authorities for businesses affected by COVID restrictions. Business rates in England were not payable for 12 months from 1 April 2020 for retail, leisure and hospitality businesses and qualifying nursery businesses. This also applied to businesses in Wales with a rateable value of £500,000 or below.

In England, those businesses were also given 100 per cent business rates relief from 1 April 2021 to 30 June 2021, reducing to 66 per cent business rates relief from 1 July 2021 to 31 March 2022. In Wales, those businesses (with a rateable value of £500,000 or below) are also being given 100 per cent business rates relief from 1 April 2021 to March 2022. Clients should contact their local authority to find out if they qualify. For the 2022 to 2023 business rates year, governments in England and Wales have both announced that they plan to give retail, hospitality and leisure businesses 50 per cent business rates relief on bills up to £110,000 per business. Clients should contact their local authority for information.

A variety of grants for ratepayers have been made available through local authorities in England and Wales. Support tends to be time-limited, with each scheme having its own set of rules. Because of the changing nature of the support on offer, clients should contact their local authority to check whether any help is available.

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 and their premises are open to the public, it is probably impossible to stop enforcement agents (who act on behalf of the landlord) from making a peaceful entry to her/his premises. Some landlords regard taking control of the whole of a business’s stock as the easiest way of recovering rent arrears, but this usually forces 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 enforcement agent cannot take control of goods at the client’s home address unless the client has taken goods there to avoid them being taken by the enforcement agents.

See here for more information about enforcement agents and commercial rent arrears.

COVID: protections from recovery of rent arrears

From 26 March 2020 until 25 March 2022, a business landlord cannot end a lease early and take back the premises due to rent arrears. Since 25 April 2020, temporary COVID measures have also been in place that increase the amount of unpaid rent that is required before a business landlord can use enforcement agents without a court order. These protections are expected to end on 25 March 2022. A client should seek specialist advice if s/he owes commercial rent arrears and the landlord is threatening the use of enforcement agents.

The premises lease

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 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 that 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 that 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 equipment 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 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, since 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 because 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 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 type of tax. Businesses with a turnover of £85,000 or less a year (2021/22) do not have to register for VAT, although they can choose to register voluntarily. All other businesses have to register for VAT, unless HM Revenue & Customs (HMRC) grants an exemption from registering. VAT-registered businesses must file returns at a frequency agreed with HMRC to show the difference between the VAT they pay to other suppliers (input tax) and the VAT they charge their customers (output tax). On 1 April 2019, most VAT registered businesses needed to sign up to Making Tax Digital. These businesses need to keep digital records and use HMRC compatible software to produce and submit their VAT returns. From 1 April 2022, all VAT registered businesses must sign up for Making Tax Digital unless they have an exemption from doing so. If a VAT return or payment is late, HMRC may be able to add a surcharge. This can increase the amount owed. Changes are being made to these rules from January 2023. This is a complex area. If a client disputes any surcharges or penalties that HMRC has applied, signpost her/him to specialist advice. Also, if the VAT return is outstanding, HMRC can estimate the amount due and issue its own assessment. The amount estimated by HMRC is 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 that 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 officers can be more aggressive in the recovery of VAT.

Once payment is outstanding, the HMRC officer at a local office usually uses the threat of enforcement action (ie, ‘bailiffs’) to take control of goods to force payment. This may initially consist of a visit, phone call or letter to state that enforcement action will be used. An enforcement notice giving seven clear days before action will then warn that immediate payment is required and enforcement agents 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 enforcement agents 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 enforcement agents) and therefore negotiation is essential. A client who is still trading should always try to give the enforcement agents 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 the business.

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; and

•explain the seriousness to the client. Use a small business adviser if necessary to look at the viability of the business and its credit control procedures.

If taking control of the client’s goods is not appropriate, HMRC can use other methods to collect the debt, such as county court action. If the debt is for at least £1,000, HMRC could take money directly from the client’s bank account without a court order (although usually the first £5,000 in the account is protected).

HMRC also uses bankruptcy as a means of collection (see Chapter 10). Any threat of bankruptcy must be taken seriously.

While HMRC has the power to ask the court to issue a judgment summons and to ask the magistrate’s court to recover certain VAT debts, HMRC does not currently use these methods of recovery. (A county court judgment summons to force attendance could potentially lead to imprisonment. Although rare, such a summons can be used by HMRC when they suspect a client to be avoiding payment.1)

1 »

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 make a payment for each relevant tax 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.

In addition to the tax due on its profits, a business may also owe tax and NI 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 and time limits apply. 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, because HMRC has a policy that payment arrangements are not accepted until returns are up to date.

If a tax bill is unpaid, HMRC may be able to use the following types of enforcement:

•a debt collection agency;

•take control of goods – ie, use enforcement action without a court order (see Chapter 15);

•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 12);

•seek a bankruptcy order (see here).

HMRC also has the power to ask the county court to issue a judgment summons and to ask a magistrate’s court to recover certain tax debts, but does not currently use these methods of recovery. (A county court judgment summons to force attendance could potentially lead to imprisonment. Although rare, such a summons can be used by HMRC when it suspects a client to be avoiding payment.1)

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 HMRC. HMRC will still consider starting bankruptcy proceedings, even if this is unlikely to lead to a payment being made. Any threat of bankruptcy must be taken seriously.

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 without requiring a court order.

HMRC is entitled to claim interest (2.75 per cent a year) on any unpaid tax until payment, and enforces this even after a county court judgment has been granted.2TMA 1970 Once a judgment has been made, an administration order may be possible if the debts are below £5,000 (see here).

It is possible to negotiate a time to pay arrangement with HMRC. Although it is generally easier to negotiate after the client has ceased trading, as with all negotiations, the outcome depends on the client’s individual circumstances. HMRC’s guidance How to pay a debt to HMRC with a Time to Pay Arrangement is available at . It explains the process and what information a client will usually need to provide HMRC.

A client may also be able to set up an online time to pay arrangement for her/his self-assessment tax bill through her/his Government Gateway account without having to speak to HMRC. To do this, a client must have filed her/his latest tax return and be within 60 days of the payment deadline. The client must also owe less than £30,000 and plan to pay her/his debt off within the next 12 months or fewer.

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2 TMA 1970 »

COVID help for self-assessment clients

HMRC has offered several forms of help during the pandemic. For clients who need to submit an online self-assessment return for the 2020/21 tax year (due on 31 January 2022), HMRC has also said that it will not charge:

•late filing penalties for those who file online by 28 February 2022; or

•late payment penalties for those who pay the tax due in full or set up a payment plan by 1 April 2022.

The payment deadline for self-assessment is unchanged (31 January 2022) and interest will be charged from 1 February 2022 on any amounts outstanding.

Choose a strategy for non-priority debts

The impact of a debt strategy on a client’s ability to continue trading depends on several factors and varies from business to business. The type of impact can depend on the client’s business status and may also be affected by the type of business s/he runs - eg, if the business needs a certain type of licence to trade, some strategies may put this at risk. You will also need to consider whether any agreements essential to the business, such as a premises lease, could be terminated by the creditor if the client enters a particular debt strategy. If there is any doubt about how a debt strategy could affect a client’s business, signpost the client to specialist advice.

Bankruptcy and individual voluntary arrangements

Bankruptcy and individual voluntary arrangements (IVAs) are discussed in Chapter 10. Bankruptcy may often be the most satisfactory way out of the large debts that can arise after the failure of a business. Bankruptcy does not necessarily mean a sole trader 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 is affected for considerably longer and, if the client wishes to run a business that will require credit in the future, bankruptcy can be an obstacle to securing credit. Someone with an otherwise viable business but serious debts may be better advised to consider an IVA.

In most cases, if a partner in a business partnership applies for individual bankruptcy, the business partnership is dissolved. If all partners wish to go bankrupt, then a joint partnership aplication can be made. Only one petition fee and only one official receiver’s deposit are payable, so the costs of bankruptcy are reduced. 1 (para 48.56)

A client is not able to act as a director of a limited company or member of a limited liability partnership while s/he is subject to a bankruptcy order unless s/he gets permission from the court.

1 (para 48.56) »

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