By Amy Mehers, Associate Director of LC Advisory
There are currently more than 8million people in the UK struggling with some degree of problem debt and figures show that UK personal insolvencies have hit an eight-year high.
A significant proportion of these are SME owners who have put themselves at risk of personal insolvency in an attempt to stave off workforce redundancies and company liquidation.
HMRC is seeking legislative changes to ensure that the appropriate levels of tax and National Insurance are being paid. Its aggressive stance will see both companies and individuals hit with tax liabilities, which will push those who are already over-indebted into even greater financial distress or failure.
There’s no denying that times are particularly tough for many people, but expert advice is available – and it’s worth seeking it, ideally sooner rather than later.
Setting the scene for the rise in personal insolvency
In the last decade, British households borrowed over £72billion on credit cards and racked up unsecured debt of £225billion in 2019 – up from £179.5billion the decade earlier.
Add to this Brexit uncertainty, weak salary growth and tighter credit rules and it’s not difficult to see why more people are finding themselves insolvent.
UK personal insolvencies rise to an eight-year high
The increase in personal insolvencies in the third quarter of 2019 sent the total number of people in England and Wales whose liabilities exceed their assets – making them unable to pay their debts – to the highest level since 2010.
By the end of October 2019, over 93,000 individual insolvencies had been reported for the year to date. 30,879 of these were in Quarter 3 and almost two thirds of which (19,773) were through Individual Voluntary Arrangements (IVAs).
The number of IVAs reach a record high
An IVA is a legally binding agreement between an individual and their creditors. Only a licensed insolvency practitioner can propose an IVA on behalf of a client and the term of an IVA can range anywhere from 3 months to 6 years depending on the deal offered.
Being a private deal between the client and their creditors, an IVA proposal is often preferable to bankruptcy. The costs are significantly lower and allow the client to remain in control of their assets. HMRC and council authorities are increasingly using legal proceedings – such as bailiff enforcement and bankruptcy – and an IVA can provide protection from this.
Struggling to meet deadlines and demands
The situation is soon to be exacerbated with the 31st January upon us – the deadline by which online self-assessment forms must be submitted. By this date sufficient funds should have been saved from income to pay all tax owed.
For many, this isn’t possible and the amount of money owed to HMRC in overdue bills has recently risen sharply – standing at over £1.6billion for the last tax year.
Targeting tax avoidance
HMRC has introduced a number of measures and legislation to target tax avoidance. One such legislative change is IR35, which has been met with widespread criticism by many contractors who have adhered to tax laws.
The UK’s IR35 legislation reforms were introduced in 2017 but will be implemented in April 2020. It ensures that contractors who are working as an employee – yet operate through an intermediary such as a personal service company (‘PSC’) – pay the same tax and National Insurance contributions as if they were directly employed.
Up until now, the PSC has self-assessed their own tax status, with HMRC believing that there has been widespread noncompliance and that the legislation has been ineffective.
So, in April this year, responsibility to assess IR35 status will be shifted from contractors to the large and medium companies for which they work. Fortunately, the legislation will not be retrospective but, by the end of the tax year – where IR35 applies – the fee payer will become responsible for ensuring the tax and National Insurance contribution is accounted for and up to date. This includes the additional cost of the employer’s National Insurance contributions.
If HMRC disagrees with the determination, it will investigate. If proven incorrect, HMRC will insist on the repayment of back tax, together with interest and fines.
Time to Pay
HMRC initially engages with an individual through the local tax office by opening an investigation.
If it’s determined that tax is due, typically this will be an amount they cannot afford as substantial interest and fines have been added to the tax owed.
It is at this point that a demand will be made and, in some cases, a dialogue opened to determine possible repayment methods. Some individuals may be able to repay the debt in full but may need time to do so by way of a Time to Pay Arrangement (TTP).
Whilst HMRC is agreeing to longer repayment periods for TTPs for some areas of tax delinquency, usually they would expect to recover all outstanding tax within a maximum one-year period. Additionally, a TTP is only possible if tax returns are up to date and it can be demonstrated that future tax obligations can be met.
Before advising a TTP as the most preferable option for a client, it’s important to consider their entire financial indebted position. What other debts do they have? Do they have credit cards, loans, overdrafts, personal guarantees, overdrawn director’s loan accounts, for example?
In the event that HMRC remains dissatisfied, bankruptcy proceedings will be issued, and, on occasions, bailiff action used. Whatever the route, there are options available – even if negotiations have broken down and a bankruptcy court hearing date is set. At this point, it’s important to take advice from a licenced insolvency practitioner.
Supporting SME owners
For those SME owner clients who come to us unable to afford to pay tax, we work alongside colleagues in our Corporate Strategies (CS) team – the corporate turnaround and debt advisory division of Leonard Curtis – to negotiate repayment solutions with HMRC.
We often find that clients don’t understand the likes of Accelerated Payment Notices (APNs) and Time to Pay Arrangements and by the time their accountant has become aware of the situation, the tax position is serious and expert negotiation is necessary to secure a deal.
Providing expert support
Every day at LC Advisory we meet with an increasing number of business owners who have tried to keep their companies afloat through unsecured consumer credit. As a consequence, their personal debts have spiralled.
Often directors give personal guarantees to support their company’s lending and, following failure, they find themselves pursued personally for business debts. The debts are often significant and asset-based lenders and funders are likely to issue bankruptcy proceedings against a director following default and a statutory demand.
Retaining control of the situation is key if a positive outcome is going to be achieved.
However complex the situation – and regardless of the amount owed – the advice given by LC Advisory is always simple and non-judgemental.
We can’t stress enough how important it is to tackle any debt issues as soon as possible. Most cases arise by either failing to recognise a problem or making bad decisions when it is recognised. And, by working in partnership with other divisions of our Group and the client’s wider team of advisers, we provide a support network for future planning.
For more info visit http://www.lcadvisory.co.uk or call 0161 413 4940.