Newer version available

There is a newer version of this publication available:
Debt Advice Handbook Scotland 1st ed - with new material

Sole traders

• Giving advice to a sole trader
• If a client is still trading
• If a client has ceased trading

Giving advice to a sole trader

A sole trader is a person who is self-employed and runs their business on their own (without any business partners). Sole traders can use their own name for their business or use a separate business name.

Sole traders do not register their business with Companies House and their business name should not end with ‘Ltd’ or ‘limited’.

Sole traders are legally responsible for their business. They are personally liable for any debts created through running their business and personally own any business assets.

Typical sole traders might include plumbers, electricians, gardeners, beauty therapists, taxi drivers, food delivery services and salespeople who work on a purely self-employed basis.

Sole traders should be registered with HMRC and provide a self-assessment for tax purposes every year. They can register as self-employed at gov.uk/register-for-self-assessment.

A sole trader will not have wages but will take ‘drawings’ from the profit of the business. The client may not necessarily understand this difference – ie, they will simply pay themselves monies from the business bank account. While these ‘drawings’ can be taken at any point, it is important to note that these are not deductible in working out the profits for the business and the client will have to pay tax on the profits through the self-assessment system.

A sole trader and their business are one and the same. If the business struggles to pay its debts, the client’s income and assets may be at risk. Therefore, consider the client’s overall situation.

If a client is still trading

You may be able to give advice about dealing with personal debt emergencies, such as council tax enforcement agents (sheriff officers) and, if it has been established that the advice will not negatively impact the client’s business, provide basic advice about dealing with personal creditors.

At the time of writing, individuals could still apply for a ‘statutory moratorium’ (see here) to protect themselves from enforcement action such as an earnings arrestment (if employed) or a bank arrestment or attachment or a creditor applying to have them declared bankrupt – the duration of the statutory moratorium protection at the time of this review was six months.

You may also be able to advise the client about the implications of continuing to trade, such as the risk to assets and further indebtedness.

Specialist advice is needed if the client has any business debts or complex business issues, such as a disputed tax debt. The client also needs specialist debt advice before deciding how best to proceed with their debts. A specialist adviser looks at the client’s overall situation (at home and in the business) and discusses how any action the client takes could affect their ability to continue trading. For example, a sole trader plumber who relies on trade credit for their business supplies may struggle to meet the credit limits imposed by bankruptcy or the Debt Arrangement Scheme. The client needs to be prepared to inform the supplier about this if they borrow more than the limit imposed by the legislation. Such a disclosure could put the client’s supply at risk.

If a client has ceased trading

Check whether the client has any complex business debts, such as an ongoing liability for a business lease. If any complex debts are identified, the client needs specialist advice. Specialist advice might also be needed if the client has a disputed tax debt or has failed to submit tax returns (see TaxAid1taxaid.org.uk; telephone: 0345 120 3779).

Providing the client does not have any complex business advice needs, you can usually give the client full debt advice. You should check whether the client has told their creditors, suppliers and HMRC that they have stopped trading and give advice on that if needed.

If the client has ceased trading and is no longer self-employed, they must inform HMRC.2gov.uk/stop-being-self-employed If not advised, HMRC will assume that the individual is still self-employed and so self-assessments returns will still be required to be submitted – failure to submit self-assessments can lead to penalties and fines being imposed.3gov.uk/self-assessment-tax-returns/penalties

 

1     taxaid.org.uk; telephone: 0345 120 3779 »

2     gov.uk/stop-being-self-employed »

3     gov.uk/self-assessment-tax-returns/penalties »