Business Debts Overview
This factsheet provides an overview of dealing with business debt including monies owed to HMRC, business rates, rent and utility arrears, accountants’ bills, equipment leases and suppliers’ debts. It will also discuss options for dealing with the liability for sole trading, partnership debts and that of a Limited Company.
Table of Contents
- Liability for Business Debts
- Dealing with Business Debts
- Debts owed to HMRC
- Income Tax Debt
- VAT Debt
- What can HMRC do?
- Business Rates
- Business Rent arrears
- Utility Arrears
- Debts owed to suppliers or trade creditors
- Equipment Leases
- Accountancy Debt
- Debt options for sole traders
- Partnership debts
- Options for Limited Company Debts
- Useful Contacts
1) Liability for Business Debts
To deal with your business debts, you should first establish what your business status is.
The most common three business statuses are:
A sole trader runs their own business without employees, normally under a trading name. They alone are liable for all the debts incurred by the business, if the debts cannot be repaid their personal and business assets are at risk.
A partnership consists of at least two people with profits divided between all partners. Each partner has a stake in the business and, dependent on the partnership agreement, all partners are liable for debts incurred by the partnership. All partners are solely responsible for their individual tax and National Insurance contributions. If the debts cannot be repaid, all partners’ personal assets along with the business partnership assets are at risk.
A limited company is set up to run a business. It is its own legal entity, meaning liability for each individual shareholder or director is limited. The individuals who create the company are listed as directors with the responsibility to act in the best interests of the company.
If the Limited Company cannot repay its debts the directors are not personally liable, unless a personal guarantee has been given.
2) Dealing with Business Debts
The first step is to determine both business and personal budgets. Calculating the income and outgoings for both business and your own personal circumstances will reveal any surplus amount, which will help to determine the best path to deal with debt. Budgets are normally calculated over a period of three to 12 months and may also need to take in to account Value Added Tax (VAT) and Corporation tax on business profits.
The options available with regard to business and personal debts depend on whether the business is still viable, makes a profit, and what level of income can be taken from the business.Back to top
3) Debts owed to HMRC
HM Revenue & Customs (HMRC) is the government department responsible for collecting all personal and business taxes. HMRC are inclined to take action against individuals and businesses faster than other types of creditors. All debts to HMRC should be treated as priorities.Back to top
4) Income Tax Debt
When dealing with income tax arrears, you must consider the following:
- If you complete your own Self-Assessment tax return, when submitting online you should immediately check if the tax owed is correct by your own calculations. If you think it’s not you should contact HMRC to discuss what is owed, and they can work through your accounts with you to establish if an error has been made
- If you or your accountant have not sent HMRC your annual Self-Assessment tax return, the income tax arrears for each year will be an estimated amount and can be a vastly different figure to what you actually owe. While your annual returns remain outstanding, you have no right of appeal against the amount estimated by the determination. So if you think the figures are wrong send HMRC your completed tax return as soon as possible and they will then recalculate the actual tax that you owe
- You should submit your tax return to HMRC as soon as possible, even if you have not completed it. Penalties will be added to late tax returns and the later they are, the higher the penalties will be. The deadline for sending in your self-assessment tax return is January 31st.
- HMRC will add interest to your tax debt at the set rate of 3.25%. It is very rare for HMRC to stop adding this interest. This means that the amount you owe will increase.
If any of your tax returns are still outstanding, HMRC will not usually discuss your affairs in much detail with you or allow you further time to pay your debt back in instalments.
HMRC will usually accept instalments to clear what you owe, usually over a period of up to one year. They will also be more likely to allow you to repay the debt over a set period if you have not previously been in arrears on your tax accounts.Back to top
5) VAT Debt
VAT is a tax paid for by the consumer in the purchase price of goods or services and your role as a business is to collect the VAT amount on goods provided and pay it to HMRC.
You must be registered to pay VAT if your annual turnover is above the VAT threshold of £85,000. The amount a business will be liable to pay is calculated by taking the VAT from sales and subtracting the VAT on purchases for goods and services purchased for that business.
Contact HMRC to register for VAT if your business turnover is above the threshold or to de-register if sales drop below the threshold. This will help to make sure you don’t over or underpay what you will be determined to owe.
Make sure all your VAT returns have been sent to HMRC as they fall due – this will be either quarterly or monthly depending on what you have chosen for your business. If your VAT bill has been assessed and you disagree with the amount claimed, you can ask for a review within 30 days from the date you submitted your VAT returns. If you disagree with the decision, you can appeal to a VAT tribunal.
If you have stopped trading but you have an outstanding VAT bill it is usually possible to come to a payment arrangement with HMRC. The period HMRC will allow for this to be repaid will be dependent on the amount of VAT you owe and how much you can afford to repay each month. However, penalties and interest for late payment will be added to your VAT bill.
You should treat VAT arrears as a priority debt as HMRC are more likely to act on VAT arrears than some other tax debts.Back to top
6) What can HMRC do?
HMRC can try to recover the money you owe in several different ways, dependent on if you are trading as a sole trader, partnership or limited company.
HMRC have officers who can visit you at your home or business premises and ask you to repay your debt or your limited company’s debt. If you do not, or are not able to repay, the officer may issue a distraint notice. This involves making a list of your business assets that could potentially be seized and sold to cover both the debt and the cost of selling the assets. After issuing a distraint notice you will be left with a walking possession order. This states that goods can be seized and subsequently sold at some point after seven days has elapsed from the issuing of the distraint notice if you do not repay.
If you are a sole trader or in a partnership, HMRC can make a claim through the court to get a judgment against you personally. A judgement through the Enforcement of Judgements Office (EJO) is most commonly used to recover personal income tax and National Insurance arrears. A judgement will be recorded on your personal credit reference file for six years and can affect your ability to get further credit.
If you are a sole trader or in a partnership, and you owe £5,000 or more, HMRC can apply to make you bankrupt. Your assets could be sold to help pay your debts. You will receive a statutory demand before being made bankrupt. This is a legal document which shows what HMRC claim you owe. Bankruptcy is usually a last resort for HMRC after other methods of recovering the debt have been attempted. It is very important to communicate with HMRC to make them aware if you have very little income or no assets, particularly if your home is worth less than any mortgage or secured loans on it as they may then decide not to make you bankrupt.
If you are trading as a limited company and the company owes £5,000 or more, HMRC may apply for compulsory liquidation. A court order will be made for your company to be made bankrupt or wound up. This legal process ends with the company’s removal from Companies House register and it will effectively cease to exist.Back to top
7) Business Rates
Business rates are paid to Land and Property Services (LPS). If you have started or stopped trading, you should inform LPS straight away to avoid arrears on your account. You will still be responsible for paying business rates if you still lease premises, even if they are empty. However, there may be rates relief that you can claim under the small business rate relief scheme, find out more here: www.nibusinessinfo.co.uk/content/small-business-rate-relief. Business rates should be treated as a priority debt if you are continuing to trade.Back to top
8) Business Rent arrears
When you cease trading you may be liable for the rent until the lease expires.
If your landlord evicts you from the business premises the lease will end and you will not be liable for ongoing rent and business rates. If you have stopped trading you can treat the rent as a non-priority debt and negotiate payments you can afford with the landlord.
9) Utility Arrears
If you are a sole trader or in a partnership, utility debt from your business premises can be transferred to your home account if the accounts are in the same name and provided by the same supplier. In this situation, you could be disconnected at home for arrears from your business premises. If this is the case, you must treat utility arrears as priority debts. Make an offer of payment to clear the arrears as well as paying your current bill.Back to top
10) Debts owed to suppliers or trade creditors
If you have debts to businesses that currently or used to supply goods and services to you, they could take further action against you to recover their money.
Sometimes trade creditors will use a debt collection agency to retrieve their money. A debt collection agency has no greater powers than the organisation you owe the money to. Trade creditors may make a claim through the Small Claims Court or through the Enforcement of Justice (EJO) to get a judgment against you. The supplier should send you a letter before they start either of these actions telling you how to pay and how to contact them to discuss what repayment options you might have.
11) Equipment Leases
You may have leased equipment for your business. Check the agreement to see whether you have the right to keep the equipment at the end of the lease. You may have to pay for the equipment until the lease runs out whether you return the equipment or not. Check with the leasing company if the debt can be reduced if you return the equipment. If you no longer need the equipment because you have ceased trading, you can treat this as a non-priority debt and negotiate payments you can afford with the company.
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It is a criminal offence to sell leased equipment without consent of the company.
12) Accountancy Debt
If you employ an accountant to deal with your tax returns, you may have a problem if you are not up to date with their bill. Sometimes accountants refuse to complete tax returns or give you back your accountancy logs and books if they have not been paid. This can cause problems with HMRC if they have sent you an estimated tax bill that is too high.
If you cannot get your books back, you should try to give HMRC a summary of your trading figures from any papers you have. You can ask your accountant to return books and paperwork that you provided to them however they do not have to forward any accounts that they may have completed if you have not paid your bill. They may even agree to send your completed accounts to you regardless of their fees being outstanding if they can see you are not able to make payment to them, or you may be able to make an agreement to receive the accounts for a part payment instead.Back to top
13) Debt options for sole traders
There are various options to deal with your debts if you are a sole trader. These will be determined by whether your business is making a profit.
If you find you have a surplus available to offer your creditors, there are a number of different options available to you. These could include informal negotiation, a Debt Management Plan or an Individual Voluntary Arrangement.
If you do not have a surplus to offer your creditors, your options could include a Debt Relief Order or bankruptcy or you may have to take steps to cease to trade as your business may not be viable.
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For information on Debt Management Plans, Individual Voluntary Arrangements, Debt Relief Orders and any other debt options, visit the relevant page in this section.
14) Partnership debts
All partners in a firm may have to take steps to deal with their own liability towards debt, as there is no specific insolvency legislation to deal with partnerships.
Options available in a partnership are the same as those for a sole trader. The best option for you will be determined by whether the debts are all partnership debts, your personal debts or a combination of both.
If you have a surplus to offer your creditors, you and the other partners in the firm may have options available to you including informal negotiation, a debt management plan (DMP) or an individual voluntary arrangement (IVA). The IVA can also be interlocked with other partners in the firm to deal with all company debts in one procedure.
If you do not have a surplus after completing a budget, you and the other partners in the firm may consider a Debt Relief Order, bankruptcy or you may have to cease trading as your business partnership may not be viable to continue to trade.
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The options available for partnerships to deal with their debts are complicated depending on the liability for debts, and all partners must assess their financial situation separately. Advice NI have a Business Debt Service that can give further, more specific and in-depth advice on your debt options as a partnership. Contact them on 0800 0838 018 or visit www.adviceni.net.
15) Options for Limited Company Debts
Debts involving limited companies can be complicated. You may need to speak to a solicitor or insolvency practitioner about certain issues.
If your limited company is struggling to pay its debts, think carefully about whether it can trade through its financial difficulties. Complete a business budget sheet with the company’s income and outgoings, budget for corporation tax, PAYE for employees and value added tax (VAT).
If there is a monthly profit after all outgoings have been considered (a net profit), it may be possible to make offers to all of the company’s creditors. If so, then you could be able to proceed with either an informal arrangement or a Company Voluntary Arrangement (CVA).
If there is no monthly profit remaining after all outgoings have been considered, then your company may be insolvent and cannot meet its debts as they fall due.
If the company is insolvent, then options include compulsory liquidation, compulsory voluntary liquidation, administration, prepack administration or a creditor could act to appoint a receiver for the company. Depending on your circumstances, you may also consider ceasing trading and eventually strike-off the company.
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Dealing with Limited Company debts is a much more complicated area; therefore it is vital you receive advice from a specially trained debt adviser. Advice NI have a Business Debt Service that will give you further, more specific and in-depth advice on your debt options for a limited company. Contact them on 0800 0838 018 or visit www.adviceni.net.
16) Useful Contacts
|Advice NI Business Debt Service
Monday to Friday 9.00am to 5.00pm
|Freephone: 0800 915 4604|
|Advice NI HMRC Tax and Benefit Service
Monday to Friday 9.00am to 5.00pm
|Freephone: 0800 915 4604|
|Federation of Small Businesses
|Phone: 02890 326035|
|Land and Property (LPS) Rating Enquiries
|Phone: 0300 200 7801|
|HMRC Business Payment Support Helpline
Mon-Fri 8am to 8pm, Sat-Sun 8am to 4pm
|Phone: 0300 200 3835|