Business Individual Voluntary Arrangements

Although there are tax accounting differences between a sole traders and limited companies, the largest difference you’re likely to encounter is if the business has financial worries.

A limited company is legally separate from its owners, and has a larger selection of formal insolvency options available to it; all of these have no immediate effect on its directors or shareholders personally.

For a sole trader, however, in the eyes of UK company law, personal assets and liabilities are treated the same as business assets and liabilities. This means that any business debt is personally owed, and is recoverable from personal assets.

Formal insolvency options

There are two formal insolvency options available to sole traders:

• Bankruptcy: if you are planning on continuing to run a business, it is usually best to avoid bankruptcy. Bankruptcy places restrictions upon your ability to trade as a sole trader, whilst also prohibiting you from acting as a director.
• Business IVA: IVAs are legally binding on all creditors, and as long as you make sure you stick to the arrangement, an IVA will protect you from bankruptcy and further legal action. IVAs usually last for 5 years. Depending on how much you owe, and how much you can afford to pay back, there may be a reduction in the amount you have to repay.

Informal insolvency options

There are also two informal options, which operate in a similar way to the corporate options of the same name. Follow the links for more information on each:

• Time to pay arrangement (for HMRC debt only)
• Informal arrangements

Time to pay arrangements, and informal arrangements are a less expensive way of reaching agreement with creditors. They are not legally binding, but if used correctly, they can be just as effective as IVAs.

In general, informal arrangements are better suited where there are lower numbers of creditors, and repayment will be made in a shorter space of time (normally less than two years).

A sole trader is defined as an individual business owner who by definition owns all business profits after tax, and is also personally liable for all debts.

Whilst it is easier to set up a business as a sole trader, working for yourself in this way means that unlike a limited company, you do not have the protection of limited liability.

Although we find that most people seeking advice for voluntary arrangements for do so in relation to their businesses debt, regular IVA proposals must be based around all debt in their name.

The proposal is normally based around a flexible monthly contribution payable for 5 years.

What information do we need from you? Initially, we’ll ask you to collate information relating to:

• Your creditors
• Your business assets including an estimate of value
• Business management accounts (where available)
• Financial projections
• Self-assessment returns
• Financial agreements and leases

From that information, we’ll work with you to prepare proposals for your arrangement. These are forwarded to your creditors and a meeting of creditors is called.

The level of monthly contribution you pay into your business IVA will be based upon:

• Business financial projections
• Other household income
• Your personal outgoings

We prefer to make your contributions fit around your businesses requirements, so if you run a seasonal business your monthly amount will vary throughout the year. For example, we would expect a garden centre to pay a lower monthly amount in the winter. In general, however:

• Most business IVAs are set to last for 60 months, though this can be altered to suit circumstances
• You’re likely to be able to continue to use any required business assets for your on-going trade

• A business IVA can help you avoid bankruptcy. Sometimes bankruptcy can be a better option, but where you have assets to protect, and a company to trade, a business IVA can work better.
• It will freeze interest and charges on your debts.
• It will stop legal actions from continuing. If CCJs are mounting up, or bailiffs are at the door, a business IVA can deal with all of these problems, and leave you to concentrate on your business.
• You may pay back less than you owe. The business IVA is set so that you pay back what you can afford over a set period. This may mean that your creditors agree to receive back less than they are owed.
• HMRC liabilities are included within the business IVA
• It will improve cashflow. Rather than paying back amounts you can’t afford to whoever is pushing you the hardest, the business IVA will set at an affordable level that is flexible around your business’ needs.
• It is legally binding on all creditors. Once agreed at the creditors meeting, and business IVA is binding on all your creditors.

If you have any questions, don’t hesitate to contact us directly.

As we’ve mentioned, as a sole trader, if your business becomes insolvent you will be personally liable for all its debts. This means that assets such your home will be at risk.

Ultimately, there is no separation between business and personal in relation to sole trader debts. At an early stage of debt problems, any adverse credit will be filed against your name personally.

This can have a much greater, negative impact on your personal finances, where mortgages or even home rental applications are concerned, for example.

Business IVAs, time to pay arrangements, and informal arrangements offer three quite different ways for a sole trader to restructure their debts. All of these options take account of business debt, but some also include unsecured personal debt, such as credit cards too.

Whichever one suits you best will depend on your level of debt, and your future plans.