Business debts (Scotland)
This fact sheet covers Scotland. We also have a version for England & Wales if you need it.
This fact sheet tells you how to deal with common business debts if you have been self-employed, but are no longer trading.
Use this fact sheet to:
get more information about debts to HM Revenue & Customs (HMRC);
understand what to do if HMRC takes recovery action against you;
deal with business rates, rent and utility arrears, accountants’ bills, equipment leases and supplier debts; and
find out where to get specialist help and advice.
Dealing with business debts
This fact sheet gives information about business debts that self-employed people commonly have. We explain how you can deal with these debts if you have stopped trading. We do not give information about debts owed by limited companies in this fact sheet.
If you are still trading you will need to get more advice and information about running your business and dealing with the ongoing debts your business may have. Contact Business Debtline on 0800 197 6026.
Debts to HM Revenue & Customs (HMRC)
HM Revenue & Customs (HMRC) is responsible for collecting income tax, National Insurance and value added tax (VAT). HMRC is likely to take further action against you more quickly than some other types of creditors. This may mean that you need to treat a debt to HMRC as a priority. However, you may not need to do this if the types of action they can take do not have serious consequences for you. In the following sections we give more information on the different types of debt that HMRC collect and how they can take action to recover the money you owe. If you are not sure whether to treat a debt to HMRC as a priority, contact us for advice.
When dealing with income tax arrears, consider the following points.
After completing a tax return, check whether your tax debt is correct. If you think the amount is not correct, contact HMRC to discuss what you think you do owe.
If you have not sent HMRC a tax return, your income tax arrears will be estimated. You will be sent a ‘determination’. You have no right of appeal against this determination, so if you think the figures are wrong, send HMRC your tax return as soon as possible.
Send in your tax return even if it is late. However, if you send in your return after the deadline, penalties will be added to what you owe. The deadline for sending in your tax return depends upon how you send it. If you send in your tax return by post, the deadline is usually 31 October each year. If you send in your tax return over the internet, the deadline is usually 31 January each year. Penalties for late tax returns are a complicated area. For more information, contact us for advice.
HMRC will add interest to your tax debt at a set rate. It is very rare for HMRC to stop adding this interest. This means that the amount you owe can increase quickly.
It is important to try to make an arrangement to pay with HMRC collectors as soon as possible. You usually need to treat income tax arrears as a priority debt. Make an offer to clear the arrears and use your budget to show what you can afford. The collector will sometimes accept instalments to clear what you owe.
However, this will usually be over a short period, for example between three and six months, depending on your circumstances. If you need longer than this to pay back what you owe and you have previously had a good payment record, HMRC may agree a longer repayment period with you. Contact the Self Assessment Payment Helpline on 0300 200 3822.
Outstanding tax returns
If any of your tax returns are still outstanding, HMRC will not usually allow you further time to pay your debt back in instalments.
Value added tax (VAT)
VAT is a tax that is charged on most goods and services that certain businesses provide. You should have been registered to pay VAT if your annual turnover was above a certain amount. The amount you should have paid will usually be the VAT on your sales minus the VAT on purchases for goods and services you bought for your business.
Contact HMRC to de-register for VAT if you have not already done this. This will help to make sure they have worked out how much you owe properly.
Make sure all of your VAT returns have been sent to HMRC. If your VAT bill has been assessed and you disagree with the amount claimed, you can ask for a review within 30 days. If you still disagree with the decision, you can appeal to a VAT tribunal. If you are thinking about appealing, contact us for advice.
After you have stopped trading, it is usually possible to come to a payment arrangement with HMRC over a short period of time once you are no longer VAT registered. However, penalties and interest for late payment will be added to your VAT bill.
You may need to treat VAT arrears as a priority debt. Use your budget to help you work out what offer of payment to make. Contact us for advice.
If your budget shows that you are offering all that you can afford, HMRC will usually allow you to pay the VAT arrears over a maximum of 12 months. Call the HMRC Payment Support Service on 0300 200 3835. However, if you do not send HMRC a budget, they may ask you to clear your VAT arrears within 3 months or less.
Outstanding VAT returns
If any of your VAT returns are still outstanding HMRC will not usually allow you further time to pay your debt back in instalments.
National Insurance contributions are dealt with by the HMRC National Insurance Contributions Office (NICO). There are different types, or ‘classes’, of National Insurance contributions.
Class 1 contributions are paid by employees unless your earnings are below a certain limit.
Class 2 contributions are paid by self-employed people as a weekly flat rate unless your earnings are below a certain limit. If your earnings were below this limit and you did not ask HMRC for exemption from paying class 2 contributions, the amount they say you owe may be wrong. Contact us for advice.
Class 4 contributions are paid by self-employed people in addition to class 2 contributions, where your earnings are above the personal tax allowance for the year. Arrears of class 4 contributions are collected along with your income tax. Contact us for advice.
It is important to tell HMRC (NICO) when you stopped being self-employed.
National Insurance arrears may need to be treated as a priority debt. Use your budget to work out an offer of payment that you can afford. Contact us for advice.
It is a criminal offence not to have paid class 2 contributions on time and HMRC can ask the sheriff court to fine you for non-payment. In practice, this is unlikely. If HMRC threatens to do this, contact us for advice.
What further action can be taken against me for debts to HMRC?
HMRC can try to recover the money you owe in a number of different ways.
Changes to your tax code
For some debts to HMRC, if you are currently working for an employer either full or part-time, HMRC may try to recover the money by changing your tax code. This allows them to take the debt from your wages before you get them. If you think HMRC is trying to do this, contact us for advice.
If HMRC will not accept your offer, they will usually ask the sheriff court to grant a summary warrant. This is a special type of court order which confirms that you owe HMRC a certain amount of money.
After a summary warrant has been granted, HMRC must send you a ‘charge for payment’. A charge for payment is a formal request in writing, demanding that you pay a debt within a certain period of time, usually 14 days. HMRC cannot take further action against you (called diligence) until the charge for payment has been served and the time limit stated on it runs out. The charge for payment should usually be served by a sheriff officer and a witness. 'Serving' a document is a legal term, that means it has been delivered in the correct way.
The main types of diligence which could be used against you are as follows.
A bank arrestment and action of ‘furthcoming’. This can freeze money in your bank or building society accounts and release it to the creditor.
An earnings arrestment. This would mean that your employer has to make regular deductions from your wages and pay the money to HMRC.
An attachment of property outside your home. This is where sheriff officers would be used to try to take goods you own outside your home. These goods may then be sold to raise money to pay HMRC.
An attachment of money. This is where sheriff officers try to seize money or cheques that you hold. A money attachment cannot be made for money that is kept within your home, or in a situation where an arrestment of your bank account would be possible instead. It is a type of diligence that could be used if you operate a business which deals mainly in cash.
An application to the sheriff court for an exceptional attachment order (EAO). This would allow the sheriff officer to force entry to your home to seize and sell your goods. This type of application is not as common as other attachments and the sheriff would make the final decision about whether to grant the application.
For more information, see our Diligence fact sheet.
Time to pay at court
It is not possible to apply to the sheriff court for time to pay income tax, VAT or National Insurance arrears either before or after HMRC gets a summary warrant against you.
Sheriff court decrees
As a first step, HMRC will usually consider applying for a summary warrant against you. This is because it is a quick procedure. However in some situations HMRC may make a claim for the money you owe through the sheriff court to get a ‘decree’ against you. This is a different type of court order which confirms that you owe the money. It is usually a longer procedure. If HMRC decides to use this route, they must send you a charge for payment before they can use most forms of diligence. The types of diligence they can use include those described in the earlier section Summary warrants, as well as an 'inhibition' on the sale of property.
- An inhibition on the sale of property, such as your house, would prevent you from selling your home or taking out further borrowing secured on it.
A sheriff court decree will be recorded on your credit reference file for six years. This will make it more difficult and expensive for you to take out credit.
If you receive papers from the sheriff court about any action HMRC is taking against you, contact us for advice.
Time to pay at court
It is not possible to apply to the sheriff court for time to pay income tax, VAT or National Insurance arrears either before or after HMRC gets a decree against you.
HMRC could also try to sequestrate you (make you bankrupt). They may be more likely to do this if you have a valuable property or other assets that you own which would be sold in bankruptcy to raise money to pay your creditors.
You must owe HMRC at least £10,000 for them to be able to make you bankrupt. They must also show that you are ‘apparently insolvent’. This is a legal term meaning that you are viewed as being unable to pay your debts as they fall due. The main circumstances in which you will be apparently insolvent are as follows.
The creditor has got a summary warrant or decree against you, sent you a charge for payment and you have not paid the debt within the time stated on the charge for payment (usually 14 days).
The creditor has sent you a ‘statutory demand’ and you have not responded to it within 21 days by paying or ‘denying’ the debt. A statutory demand is a legal request for the money you owe. If you receive a statutory demand, contact us for advice.
You may be able to make yourself bankrupt to deal with your debts and stop creditors using diligence against you. However, this is a serious step. Your home, assets and employment could be at risk. If you are considering making yourself bankrupt, contact us for advice.
For more information, also see our Bankruptcy fact sheet.
Send in your tax return
If you have not already sent your tax returns to HMRC, it is very important that you do this. This will allow HMRC to calculate your debt accurately. You may find that you owe less than you first thought.
What service should I expect when dealing with HMRC?
HMRC has a service commitment set out in a Charter (called the ‘HMRC Charter’) which includes the following commitments.
HMRC will act ‘fairly and impartially’ by:
- treating your affairs in strict confidence within the law.
HMRC will ‘communicate effectively’ by:
providing clear and simple guidance; and
giving accurate and complete information.
HMRC will provide ‘good quality service’ by:
handling your affairs promptly and accurately;
keeping your costs to a minimum;
helping customers with special needs; and
being courteous and professional.
How can I complain about HMRC?
If you are unhappy with the way HMRC has dealt with your case, there is a complaint procedure that you can follow.
You may want to complain if you have been refused time to pay your arrears and you feel that this is unreasonable in view of your circumstances.
You should first contact the HMRC office that has been dealing with your case. If you are not happy with the response, your complaint will usually be passed to a ‘complaints handler’. HMRC accepts complaints by phone and in writing.
If you are still not happy with the response, you can ask HMRC to look at your case again. They will usually ask a different complaints handler to consider your case.
After going through these steps, if you are still not happy you can contact the Adjudicator’s Office. See Useful contacts at the end of this fact sheet. The Adjudicator is not part of HMRC and they can act as an impartial referee for unresolved complaints.
If you are not happy with a decision that HMRC has made, such as the amount of tax you owe, or the charges they have asked you to pay, you may need to follow the review and appeals process instead of complaining. Contact us for advice.
Details of how to contact HMRC to make a complaint can be found on their website. Go to www.gov.uk and search for 'Complain about HMRC'.
Business rates are a tax you have to pay to the council. If you have stopped trading, tell the council straight away. You may be responsible for paying business rates if you are still leasing premises, even if they are empty. However, there may be discounts that you can claim. You may also be entitled to ‘relief’ from business rates in certain circumstances. Contact us for advice.
Check the bill to make sure it has been calculated correctly.
Business rates are a priority debt. Use your budget to work out an offer of payment that you can afford.
The council can use the summary warrant procedure against you for unpaid business rates. The types of diligence that the council can use are the same as those that HMRC can use. See the earlier section Summary warrants. The procedure is almost exactly the same as for unpaid council tax.
If you owe £10,000 or more, your local authority could apply to make you bankrupt (sequestrate you). The process used is similar to that for HMRC debts. See Bankruptcy in the earlier section What further action can be taken against me for debts to HMRC?.
Remitting business rates arrears
The council has the power to remit (write off) all or part of your business rates arrears. In practice, local authorities do not agree to this very often. However, it may be worthwhile making an application if you feel that you can show that you are in exceptional circumstances.
In order to remit business rates, the council must be satisfied that:
you would suffer hardship if they did not remit the business rates; and
it is reasonable for them to remit your business rates, taking into account the interests of local people.
You need to write to the council asking for your business rates to be remitted under section 25A Local Government (Scotland) Act 1966.
explain how you would suffer hardship if the business rates arrears are not remitted;
explain what steps you have taken to make the business work; and
give full details of your budget and any assets you have.
The water supply to your home cannot be disconnected for non-payment. However, this does not extend to supplies to business premises. If you have stopped trading, old business-related water debts can usually be treated as non-priority debts.
The water supplier may make a claim through the sheriff court to get a ‘decree’ against you. This is a court order which states what you owe and how it should be repaid. The supplier may then be able to take further action (diligence) against you. The types of diligence they can use are similar to those described in the earlier section Summary warrants.
Gas and electricity arrears
If you have debts from your business premises for gas and electricity, suppliers have the same powers of recovery for each.
A 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 electricity and gas arrears as priority debts. Make an offer of payment to clear the arrears as well as paying your current bill.
Debts to old business suppliers
If you have debts to businesses that used to supply goods and services to you, they could take further action against you to recover their money.
Debt collection agencies
Sometimes old suppliers will use a ‘debt collection agency’ to try to collect their money. A debt collection agency has no greater powers than the organisation you owe the money to. They have no right to come into your home. You can usually treat debts to old business suppliers as non-priority debts. Use your budget to make an offer of payment that you can afford. However, some debt collection agencies who collect old supplier debts may threaten to take court action quite quickly.
Sheriff court action
Old suppliers may make a claim through the sheriff court to get a decree against you. This is a court order which confirms that you owe the money. It is the first step in them enforcing the debt against you using ‘diligence’. The supplier will usually send you a letter before they start court action telling you how to pay and how to contact them to discuss your repayment options. The types of diligence that can be used are the same as under the summary warrant route for debts to HMRC. See the earlier section Summary warrants.
If you owe £10,000 or more, your old supplier could apply to make you bankrupt. The process used is similar to that for HMRC debts. See Bankruptcy in the earlier section What further action can be taken against me for debts to HMRC?.
Business rent arrears
You may have had a lease for business premises. A lease is a legal agreement, drawn up in writing, which allows you to occupy and use a property for a certain length of time. When you cease trading you may still be liable for ongoing rent and any arrears even if you have given up the lease and returned the keys to the landlord.
If your lease runs from month to month, then you must give the correct period of notice before leaving. However, your liability usually ends when your lease finishes. Check the terms of your lease agreement.
If your lease is over a period of years, you may be liable for the rent until the lease expires or a new occupier is found either by you or the landlord. Check the terms of your lease agreement.
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 this not does happen, and you are liable for the ongoing rent, you may be able to sublet or ‘assign’ the premises. Check your agreement. The landlord should not normally ‘unreasonably refuse’ to let you do this.
Ask the landlord to let you surrender the lease. If the landlord accepts surrender of the lease they will be liable for business rates while the property is empty. Therefore, they are unlikely to agree unless they can easily find another tenant.
After you have stopped trading you can treat the rent as a non-priority debt and negotiate payments you can afford with the landlord. Contact us for advice.
You may have had an agreement with a company to lease 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 keep paying for the equipment until the lease runs out whether you return the equipment or not.
Check with the leasing company if the debt will be reduced if you return the equipment. If you no longer need the equipment because you have stopped trading, you can treat this as a non-priority debt and negotiate payments you can afford with the company.
If you want to keep the equipment you have leased but cannot afford the payments, contact us for advice.
Permission to sell
It is a criminal offence to sell leased equipment without the permission of the company.
If you have an accountant who usually deals 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 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, try to give HMRC a summary of your trading figures from any papers you have.
Tell HMRC why you have no books. Ask them to accept your estimate even if you have no papers to prove your figures.
Try to negotiate with your accountant to give your books back. They may agree if they can see you are in no position to make any sort of payment to them or you may be able to make an agreement for a part-payment instead.
Bank and other credit debts
Any business overdrafts, loans and credit cards you have should normally be treated as non-priority debts. You can negotiate payments that you can afford using your budget. However, check that these debts have not been secured on any assets, such as your home. If you think you may have business debts secured on your home, contact us for advice.
Your creditors may use debt collection agencies to collect the money you owe. Debt collection agencies are not sheriff officers and they have no power to come into your property or to take your goods. You can negotiate payments with them in the same way as the original creditor.
If they are unhappy with your offer of payment, they could make a claim through the sheriff court to get a decree against you. If the debt is £10,000 or more, they may threaten to make you bankrupt. For more information, see our [Sheriff court action for debt fact sheet].
Solutions to deal with my debts
See our Ways to clear your debt fact sheet to compare:
how big or small your debts must be to use the available solutions;
what type of debt you can repay using each solution; and
how long each solution might last before you are debt free.
Adjudicator’s Office Phone: 0300 057 1111 www.adjudicatorsoffice.gov.uk
Business Debtline Phone: 0800 197 6026 www.businessdebtline.org
HMRC Payment Support Service Phone: 0300 200 3835
HMRC Self Assessment Payment Helpline Phone: 0300 200 3822.
Taxaid If you need specialist advice on tax and you are on a low income, you can phone Taxaid. Phone: 0345 120 3779 www.taxaid.org.uk