Debt: a guide for indebted sole traders and freelancers in arrears

One of the grim aspects of freelancing -- and life -- that many of us only worry about when it hits, debt, either personally or professionally, can have a very significant impact on people who work independently or for themselves.

But, indebted sole traders and freelancers in financial arrears do still have options, writes Gareth Wilcox, partner at Opus Business Advisory Group.

Knowing these options and understanding them before you need to choose or commit to one, at an invariably stressful time because you owe money, can be enormously helpful.

What happens if I get into debt as a freelancer?

For the purposes of this article, exclusively for FreelanceUK, I am addressing wholly self-employed individuals – i.e. those individuals who work on a freelance basis but not through a limited company..

The bad news in this regard, is that unlike the owners of limited companies, an individual who works as a sole trader does not have the benefit of limited liability.

The law does not draw any distinction between debts incurred in the course of business and the ordinary expenditure (e.g. household bills). So when we come to advise sole traders on debt, it is necessary for us to take into account all debts which they owe, regardless of whether they relate to the business.

Sole trader debt considerations (continued)

The lack of separate legal personality as a sole trader also means that there is no distinction drawn between an individual’s personal household assets, and those which form part of their sole trader business.

A creditor who is taking debt enforcement action will know this, so in many ways it is even more critical for a sole trader who is in financial difficulty to take early advice than a company director. Typically, in the absence of personally guaranteed lending, a director’s home is not put directly at risk by the failure of their limited company.

In the short term, individuals facing financial pressures can apply for breathing space of up to 60 days (longer if suffering mental health issues,) during which they are protected from enforcement action, and interest payments are frozen.  During that period, it would be prudent for the individual to take proper advice as to the options available to them.

What options exist for the self-employed in financial difficulty?

These options will be dependent on a number of factors, not least of all who the debt is owed to and how much it is. 

A large number of taxpayers, whether due to covid-19 or otherwise, have built up substantial tax arrears and it has been widely acknowledged that HMRC has latterly been far more forgiving in its debt recovery processes since the onset of the pandemic.

How long this comparative leniency from HMRC will last is a matter of some debate. Yet reassuringly for some,  the more accommodating taxman has been on show again by him setting up a ‘self help’ online Time To Pay application process. And the Revenue launched the service in time for the most recent self-assessment payment deadline.

What is a Time To Pay Agreement?

With any creditor, it is open to an individual to engage with them and seek forbearance and restructure a debt on an informal basis (e.g. by way of a Debt Management Plan), if terms can be agreed between the relevant parties. 

Owing to the sheer number of taxpayers it deals with, HMRC has a more formal process in place for such agreements, when you as an HMRC customer owe money arising from your tax liabilities. These agreements are known as a Time To Pay.

A TTP is an agreement with HMRC for a taxpayer to pay the debt owed over an agreed period of time, and is available for both individuals and limited companies. Anecdotally, I have been advised that since the onset of the pandemic, HMRC has been amenable to agreements to repay tax debt which cover a period of several years. This long period is not something available previously to taxpayers, self-employed or otherwise.

What’s helpful about HMRC offering more time to pay?

The advantage of a TTP is that it is not a formal insolvency process, so is not a matter of public record, and it allows an individual to discretely settle their tax debt on agreed and affordable terms. This may include an agreement by HMRC to forego the charging of interest and/or certain penalties on overdue amounts.

Whether a TTP will be granted by HMRC is usually dependent on circumstances. Unless the online form is used, ordinarily it is an HMRC employee who will make the decision as to whether an arrangement is accepted or not, which will depend on a number of factors such as:

  • The financial circumstances of the taxpayer and how the debt arose;
  • The anticipated income of the taxpayer, and absence of other assets available to pay the debt;
  • The amount of the debt itself;
  • The taxpayer’s conduct, e.g. whether there are previous defaults of returns or payments.

Whether a TTP is appropriate for a taxpayer will often depend on affordability. In order to follow this process, the individual will need to be able to make sufficient profits to pay all ongoing tax as and when it falls due, as well as the payments required under the agreed TTP. If current liabilities or the TTP payments fall into arrears, HMRC will consider the agreement in default and restart enforcement action.

Further, a TTP deals only with tax liabilities. As such, if a debtor has other material creditors in addition to HMRC, it will only be appropriate if the TTP allows other debts to be serviced. If this is not possible, or a TTP is not capable of being agreed, other options will need to be considered.

What about an Individual Voluntary Arrangement for your freelancer debts?

An IVA or Individual Voluntary Agreement is a formal insolvency process whereby an agreement is reached between an individual and their creditors, which enables the individual to settle the debts owed by them on the agreed terms and prevents creditors from taking further enforcement action while the arrangement is in effect. 

The IVA is based on a proposal document which will be prepared by the debtor with the assistance of an insolvency practitioner, who will act as ‘nominee’ presuming that fit and feasible terms can be proposed.

How do IVAs get accepted?

In order for an IVA to be accepted, 75% of the creditors who vote on the proposed terms must support it, and (subject to certain limited rights of appeal) if this majority is achieved, it will bind all creditors owed money by the debtor at the date of approval, regardless of whether they voted in favour (or voted at all). Following approval, an insolvency practitioner (often the nominee) will be appointed to act as ‘supervisor’ of the IVA, and oversee its successful implementation.

If an IVA is successfully implemented in accordance with its terms, the individual will be released of their obligations, and the debts compromised in the arrangement. If, however, it is not successfully implemented, ordinarily the supervisor will be obligated to petition for the bankruptcy of the individual concerned. (N.B. Bankruptcy is a whole other issue, which will be explored separately, shortly, on FreelanceUK).

How might IVAs help indebted freelancers?

Be aware, an IVA is a useful tool in that it binds all creditors and can assist an individual in avoiding bankruptcy, and the legal, practical and regulatory consequences which arise from it.

As such, in IVA ordinarily appropriate when a debtor has several creditors, and it is not practicable to negotiate with them on an individual basis. The IVA route is also useful for freelancers since the restraint on their ability to trade (particularly in a regulated industry) will be much less than is likely in the event of bankruptcy, and (provided creditors agree), they can exclude and retain certain of their assets. Please note, this is not the case in bankruptcy, where all assets (subject to some limited exceptions) vest in the ‘appointed trustee.’

For an IVA to be appropriate, however, the individual must necessarily have sufficient surplus income or other assets to offer a meaningful amount to be repaid to their creditors, which will result in a better outcome than their bankruptcy. 

As with a TTP, it is also crucial for an individual to ensure they can make any tax payments as and when they fall due, since HMRC will insist on this being a condition of the arrangement.

If a debtor does not have sufficient assets or income to propose an IVA, they may need to consider one of the other formal insolvency processes, such as a Debt Relief Order.

Debt Relief Order: a freelancer's need-to-know

A DRO or Debt Relief Order is designed for simple circumstances where an individual:

  • owes less than £30,000
  • has less than £75 a month spare income
  • has less than £2,000 worth of assets
  • does not own a vehicle worth £2,000 or more
  • has lived or worked in England and Wales within the last three years
  • has not previously applied for a DRO within the last six years.

Where a DRO is granted, an individual is subject to restrictions for a period of 12 months which are similar to those which apply to a bankrupt. They cannot:

  • borrow more than £500 without telling the lender about the DRO
  • act as the director of a company
  • create, manage or promote a company without the court’s permission
  • manage a business without telling those you do business with about your DRO.

If a debtor does not meet the criteria for a DRO, it cannot be applied for, and in the absence of any alternative, an individual should consider whether bankruptcy proceedings are appropriate.

Finally, there's no substitute for proper advice

This article provides an overview of available processes in England & Wales and is not a substitute for proper advice being obtained based on a person’s unique individual circumstances. Due to the wide-ranging consequences of the options, an individual in financial difficulty should take professional advice, or seek counsel from the Citizens’ Advice Bureau.


15th March 2022

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