Bev Budsworth, managing director of The Debt Advisor, is today warning barristers not to ‘bury their heads in the sand’ and to make sure they are fully prepared for the impending July tax bill deadline at the end of the month.
Bev commented: “The next fortnight is really the crunch time for barristers as their second tax bill is due.” Effectively this payment is ‘on account’ and is normally equal to half of their previous year’s tax bill. “It will be a worrying time as many will struggle to pay this year’s tax bill and some won’t have even paid last year’s tax bill off yet – putting off the HMRC debt until their cash flow is rosier.
“I am urging all barristers not to bury their heads in the sand like this and if they have mounting tax debts, they need to take action now before another payment is due.
“We are increasingly seeing barristers in large amounts of tax and VAT arrears with many of them turning to personal loans, credit cards or even specialist business finance or ‘debtor funding’ to raise capital. We understand that falling in to arrears with tax can be daunting and very stressful but seeking professional advice at the earliest opportunity is the right thing to do.
“By seeking advice early, many payment plans with HMRC can be successful if the debt can be paid back in less than 18 months. In some cases, we have also agreed longer terms but a rigorous repayment plan needs to be adhered to and provision will need to be made for future tax payments.
“For more serious levels of debt an Individual Voluntary Arrangement (IVA) can provide a viable repayment option and even achieve some debt write-off. However, if HMRC is the major creditor, the IVA needs to be ‘revenue-friendly’ so specialist advice should be sought.”
Bev concluded: “Barristers are facing a difficult period at the moment; successive governments have looked to cut the legal aid bill and new rules on conditional fee arrangements have seen barristers’ incomes take a battering. This, compounded with difficulty in getting aged debt paid and a fresh round of cuts likely on the cards from Michael Gove, barristers are in a difficult place financially.
“Traditionally barristers have been worried about entering into an IVA but in itself, this is not a disciplinary offence or a bar to practising. We understand these concerns and have worked with many barristers and solicitors to work through their debt problems and resolve their financial issues.”
A female barrister was referred to us struggling with unsecured debts in excess of £78,000 which included HMRC debts of £2,184. Her cash flow problems stemmed from a number of years of successive cut backs in fees to criminal barristers (25% cuts since 2007) which had forced her to rely on credit.
The barrister has two properties – a jointly owned residential property with equity of £38,000 of which her share was £19,000* and an investment property which was in her sole name and had equity of £19,340. As her husband had contributed to the upkeep of this property, he was able to demonstrate he had an interest in the property.
Following a number of discussions between the barrister and Bev Budsworth, agreeable terms were drafted for an IVA. When compared to bankruptcy the offer to creditors was as follows:
|Monthly contributions at £500 per month||£18,000||£30,000|
|Equity/Net worth in Residential Property (before costs)||£19,000||£1,000|
|Equity in Investment Property (net of costs and after taking into account husband’s interest)||£9,670||£7,915|
|Total Funds to be paid in||£46,670||£38,915|
|Less estimated costs||(£29,680)||(£9,993)|
|Balance for Unsecured Creditors||£16,990||£29,736|
|Total due to Unsecured Creditors||£78,443||£78,443|
|Proposed total return to creditors (dividend)||21%||38%|
|Debt to be written off (assuming IVA is concluded successfully)||£61,453||£48,707|
Creditors agreed that a 3rd party sum of £8,915 could be paid at the beginning of the IVA in place of the debtor’s interest in both properties. Thereafter, the properties were then to be excluded from the IVA and the barrister just had to worry about meeting her monthly contributions for the next five years.
The IVA is proceeding well and the barrister has sought to increase her income by offering training to others in the legal profession.
* In an IVA creditors will generally allow a debtor to retain 15% of her equity so whilst the barrister’s share of equity in a bankruptcy was valued at £19,000, in an IVA this reduced to £1,000. HMRC do however take a tougher approach on sums to be introduced into IVAs in place of equity.