IVA for Self-Employed & Sole Traders

Self-employed people face unique challenges with IVAs due to irregular income, business expenses, and HMRC debts. However, IVAs can be an effective solution if you meet eligibility criteria and can demonstrate sustainable earnings.

Evidence Required for Self-Employed IVA Applications

Unlike employed applicants who provide payslips, self-employed individuals need comprehensive business documentation:

• Self-assessment tax returns: Last 2-3 years filed with HMRC
• Business accounts: Profit and loss statements, balance sheets
• Bank statements: Personal and business accounts for 3-6 months
• SA302 forms: Tax calculations from HMRC showing taxable income
• Invoices and receipts: Recent documentation proving active trading
• VAT returns: If you're VAT registered

Your insolvency practitioner needs this evidence to prove your income is reliable enough to maintain IVA payments for 5-6 years.

Calculating Income for Self-Employed IVAs

Your IP will average your self-employed income over multiple years to smooth out fluctuations. Here's how it works:

If your business is relatively new (less than 2 years), you may struggle to provide enough trading history. Some IPs require at least 2 years of accounts, though exceptions exist if your business shows consistent monthly income.

Business Expenses and IVA Payments

Your IP will review which business expenses are legitimate and necessary:

• Allowed: Stock/materials, business insurance, professional fees, equipment, office costs, travel
• Scrutinized: Vehicle expenses (business use must be proven), meals and entertainment, home office use
• Not allowed: Personal expenses claimed as business costs

HMRC's rules on allowable expenses generally apply. Your IP may ask you to reduce expenses if they seem excessive compared to your turnover.

Including HMRC Debts in Your IVA

Self-employed debts often include tax arrears which can be included in your IVA:

• Income tax: Unpaid tax from previous years
• National Insurance: Class 2 and Class 4 contributions
• VAT: Arrears if you're registered for VAT
• Penalties and interest: Charged by HMRC on late payments

HMRC is treated as a creditor and votes on your IVA proposal like any other. They're often willing to accept IVAs as a better alternative to bankruptcy, which could force business closure.

However, HMRC will continue to expect current year tax payments during your IVA. Only historical debts are frozen. You must keep up with new tax obligations as they arise.

Can I Continue Trading During an IVA?

Yes, as a sole trader or partnership. An IVA doesn't prevent you from operating your business. In fact, your income from self-employment is essential for making IVA payments.

However, there are restrictions on certain business structures:

• Sole trader: No restrictions, can continue operating normally
• Partnership: Partners can continue, but should inform other partners about the IVA
• Limited company director: You may be restricted from acting as a director (check your company's articles of association)
• LLP: Similar to limited companies, may face restrictions

Most self-employed people operate as sole traders, so IVAs don't affect their ability to trade. You can continue winning clients, invoicing, and building your business.

What If My Business Income Fluctuates?

Seasonal businesses (e.g., wedding photographers, gardeners) or project-based work can make fixed monthly payments challenging. Options include:

• Flexible payment schedules: Higher payments in busy months, lower in quiet periods (averaging out annually)
• Payment holidays: Short breaks during very quiet times
• Percentage-based contributions: Pay a percentage of monthly profit rather than fixed amount

Your IP will work with you to design a realistic payment plan that matches your business cycle. The key is maintaining the agreed annual contribution.

Annual Reviews for Self-Employed IVA Holders

Every year, you'll submit updated accounts and tax returns to your IP. They'll review whether your payments should change based on:

• Current year's profits compared to previous years
• Changes in business expenses
• New contracts or loss of major clients
• Personal circumstances affecting living costs

If profits increase significantly, your IVA payment will rise. If business genuinely declines, payments may reduce. Honesty is crucial—your IP can verify income through HMRC and bank statements.

Starting Self-Employment During an IVA

If you're currently employed but want to become self-employed during your IVA, you must:

• Inform your IP in advance of the change
• Provide business plans and income projections
• Expect reduced payments initially while business establishes
• Submit regular profit updates (often monthly at first)

IPs are generally supportive of career moves that could improve your financial situation. However, they'll monitor closely to ensure you're not avoiding payments by understating business income.

Business Assets and IVA

Essential business assets (tools, equipment, vehicle used primarily for work) are usually protected in an IVA. You need these to maintain your income.

However, non-essential assets may need to be sold or their value contributed:

• Business vehicles used mostly for personal travel
• Excess stock or inventory
• Equipment no longer needed for current operations

Your IP assesses whether assets are genuinely necessary for earning your living. They won't force sales that would destroy your income stream.

Getting Business Finance During an IVA

Obtaining credit above £500 during an IVA requires IP approval. This makes securing business finance difficult:

• Business loans: Very unlikely to be approved
• Business credit cards: Not permitted without IP consent
• Invoice financing: May be possible with IP approval if essential for cashflow
• Equipment leasing: Sometimes allowed if necessary for operations

Most self-employed people in IVAs fund their business through retained profits and personal contributions. Plan ahead to avoid needing external finance.