Stopping sole trading: How to end self-employed freelancing

As FreelanceUK readers are usually well aware, when you’re a sole trader you are personally held responsible for business debts and therefore unprotected by limited liability, as there is no legal separation between yourself and your business.

How you got here (probably thanks to covid)

So if you encounter financial difficulty as a result of the effects of the coronavirus pandemic and the lack of government support available, you should strongly consider seeking a personal insolvency solution, such as an Individual Voluntary Arrangement (CVA) or as a final resort -- bankruptcy.

Stopping sole trading: How to end self-employed freelancing

If you reside in Scotland, you can take advantage of a wider range of personal insolvency routes, such as Sequestration, writes Sharon McDougall of Scotland Debt Solutions.

The suffering endured by sole traders as a result of Covid-19 is inevitable, as government restrictions introduced in response to the coronavirus pandemic have forced many sectors to slow down or, in the creative sectors specifically, grind to a halt.

Many freelance consultants and self-employed professionals have weathered irreparable damage, and as a result may be forced to close shop on a temporary or permanent basis.

Forecast road to recovery and scope of damage

Before you wave the white flag, make your own assessment of the extent of the damage but we recommend seeking professional advice too, as you may be able to access financial support by claiming Employment and Support Allowance, Universal Credit or a grant through the Self-Employment Income Support Scheme -- which was set-up as a response to Covid-19 and began its second phase yesterday. Importantly, you can claim this second and “final” grant (in the government’s words), between now and October 19th 2020 even if you did not claim the first grant.

Back to your sole trader structure. As there is no legal separation between yourself and your business, you will need to seek personal insolvency solutions if you expect to run out of cash and wish to end operations as a sole trader. Here are some of the options:

  • Individual Voluntary Arrangement

If you are in serious financial problems, an Individual Voluntary Arrangement (IVA) can help you restructure your debts and stop them from further accumulating. This is an effective way of helping sole traders as you will enter into an agreement with creditors to restructure payments into affordable instalments.

This process must be administered by a licensed insolvency practitioner and is typically the chosen route if you have enough disposal funds remaining each month. This form of debt relief is popular for the self-employed due to the granted pace of recovery. However, if you are unable to keep up with payments, you could be forced into bankruptcy.

  • Filing for bankruptcy

This step can significantly shape your future as a sole trader, as it will affect your financial credibility and your chances of obtaining future credit. You can either voluntarily enter bankruptcy or be forced into bankruptcy if you have unmanageable outstanding debts. Your assets will officially be managed by a ‘trustee’ who will be responsible for realising the value to repay creditors. The debt solutions available in Scotland vary to offer a ‘Trust Deed,’ ‘Debt Arrangement Scheme’ and mentioned previously, Sequestration.  Let’s explore these three.

  • Sequestration

If you decide to shut shop as a sole trader in Scotland because you are drained of cash, Sequestration is a last-resort option, which effectively declares you as bankrupt which is the UK equivalent. If you are in debt of over £1,500, this debt solution can help you cope with financial stress and write-off debts up to 90 per cent.

  • Trust Deed

This is an agreement over four years to pay off outstanding debts through affordable instalments, after which any remaining debt will be written-off.

  • Debt Arrangement Scheme

A ‘DAS’ can be entered into if you have debts over £5,000 and you are a sole trader in Scotland. The government-backed scheme can help you lower your monthly repayments to creditors by structuring them into affordable instalments, freezing interest and penalties.

Raising finance may be an alternative solution to help you cover the costs of outstanding debts, beat the pressures posed by Covid-19 or help you start afresh. However, if you are unable to commit to repayments and would rather stop trading as a sole trader, a personal insolvency solution may be better suited.

Final responsibilities to HMRC

If you’re ready to cease trading as a sole trader, you need to submit your final self-assessment tax return, for which it is optional to enlist an accountant. HMRC will require the following information:

  • Trading income
  • Allowable expenses
  • Capital expenses
  • Balancing charges if you’ve sold business equipment/machinery
  • Capital Gains Tax owed on assets sold or disposed
  • Calculate final profit or loss

If you’re registered for VAT, you should de-register for VAT when ending as a sole trader.

Tax considerations when stopping trading as a sole trader

To lower your tax bill and make an efficient exit, check if you can claim Entrepreneurs’ Relief to reduce your Capital Gains Tax liability. Overlap relief can reduce the amount of tax payable by preventing you from being taxed twice when stopping trading during a tax year. Terminal loss relief can also offset losses made during your last tax year against the profit made in the last three tax years. We recommend you consider enlisting an accountant or tax professional if such reliefs look claimable.

Life as a sole trader, post-Covid-19?

Whether it’s the pandemic or other factors forcing your freelance career to a premature end, or pause, returning as a sole trader can be easily done. Incarnating a limited company from dormancy or incorporating a new limited company are both more involved. In fact, if you recover from the storm caused by the pandemic or other pressures, and earn more than £1,000 from self-employment during the tax year, the government says you must set up as a sole trader.

Fortunately, the cost of setting up as a sole trader is minimal as your business is not treated as a separate legal entity and therefore is not required to comply with different regulations. After the return of normal trading conditions once the pandemic eases, freelancers can very easily explore a second attempt at sole trading, without having to battle against Covid-19 and the government’s related restrictions such as social distancing rules, which are continuing to cause havoc in the creative industries where its sole traders --  more than those in any other industry, are finding staying afloat the hardest.