VAT GENERAL MATTERS
Under the standard accounting scheme for VAT, output tax is chargeable at the earliest point of invoice, supply or payment (see paragraph 78.13.) As a result, a registered trader may be required to make payment to HMRC in respect of output tax that has not yet been received from the customer. If a customer fails to pay, VAT bad debt relief may be claimed
Since the introduction of bad debt relief there have been various changes made to its availability and the way it operates. For supplies made between 1 October 1978 and 26 July 1990 relief was only available for suppliers when their customers became formally insolvent. In 1990 a new scheme was introduced for supplies made after 1 April 1989. It is no longer necessary for the customer to become formally insolvent before bad debt relief can be claimed. The law that governs the claiming of bad debt relief is the VAT Act 1994 [note 1] and The VAT Regulations 1995 [note 2]
The following conditions apply before VAT bad debt relief can be claimed:
The customer who has not paid for a supply within six months of the date of the invoice (or after the date that payment was due, whichever is later) will be required to repay to HMRC any input tax they have claimed in respect of the supply, irrespective of whether the supplier has claimed for bad debt relief.
Bad debt relief is claimed in Box 4 of the standard VAT return, VAT 100 (see also paragraph 78.12). If payment is later received in respect of a supply for which bad debt relief has been claimed, the VAT element of the payment must be repaid to HMRC by including it in Box 1 of the VAT return for the period during which the payment was received.
Where an insolvency order is made a creditor's claim in the proceedings should be inclusive of VAT and the creditor must account for any VAT on debt recoveries. Further information on VAT bad debt relief can be obtained from VAT notice 700/18 which can be accessed directly at VAT notices 700/18 or by searching on the www.hmrc.gov.uk website.
If, having previously obtained bad debt relief an insolvent subsequently recovers all or part of a debt, the official receiver as liquidator/trustee must treat the amount of VAT element of the recovered book debt as output tax and account for this to HMRC.
If a registered trader transfers all or part of a business as a going concern, the sale is not usually classed as a taxable supply and VAT is not charged. The conditions for this are as follows:
A transfer of a business as a going concern will often involve the transfer of land and buildings, and there are extra rules to determine whether VAT should be charged on the transfer of land and buildings, even if the rest of the transfer does qualify for transfer of a going concern treatment.
For more detailed explanations of the VAT treatment of a business transferred as a going concern, see HMRC Notice 700/9 which is available via www.HMRC.gov.uk
HMRC have the right to check the accuracy of all returns submitted to them and to require that the books and records of the business be made available for inspection. This right continues irrespective of any insolvency order made. If the official receiver does not require the insolvent’s records for further investigation purposes, he/she may pass them to HMRC to facilitate their inquiries, provided the official receiver obtains written undertakings that:
(a) The records will be returned to the official receiver on demand; and
(b) The records will not be used in any proceedings without the official receiver being first informed.
Additionally, the official receiver should obtain a signed copy of the list of records handed over to HMRC (see also paragraph 47.65).
78.27Effect of VAT legislation on accounting records (amended September 2012)
The official receiver's powers to destroy, sell or otherwise dispose of the insolvent’s books, papers and records whilst acting as liquidator or trustee [note 3] are subject to the limitations imposed by the VAT Act 1994. A trader registered for VAT is obliged to retain certain records, as described in the HMRC public notice number 700 accessed via HMRC.gov.uk , for a period of six years from their creation. In effect this means that a registered trader cannot dispose of most of his/her records until they are six years old without the express permission of HMRC. Unauthorised disposal or destruction is a breach of regulatory requirements giving rise to a civil penalty. These provisions continue to apply where a company goes into liquidation or an individual becomes bankrupt, even if the trader concerned has been, or subsequently becomes, de-registered for VAT purposes.
All communications to HMRC concerning the destruction or preservation of VAT records should be sent to the National Insolvency Unit, HMRC, 5th Floor, Regian House, James Street, Liverpool, L75 1AD, see paragraph 78.28.
To ease the burden on the official receiver as regards the preservation of records the Insolvency Service has agreed special provisions with HMRC for the early disposal of records, subject to certain formalities. Where records are less than 6 years old but more than a year has elapsed since the bankruptcy/winding up order was made, the records may be destroyed without reference to HMRC.
Where the insolvent is registered for VAT and destruction of books and papers is appropriate in a case where records are less than 6 years old and less than a year has elapsed since the bankruptcy/winding up order was made, notification [note 4] should be sent to National Insolvency Unit, HMRC, 5th Floor, Regian House, James Street, Liverpool, L75 1AD, (see paragraph 78.27A above). The notification should inform HMRC that they have three months to respond otherwise the records will be destroyed. The second page of this form shows several options and should be completed and returned by HMRC if they require the records to be kept. The official receiver's records should then be noted with any response received, and any completed notification form [note 4] should be placed on the office file plan within Wisdom. If no response to this notice is received within the three month period given, the official receiver has authority to destroy the books and papers.
Once these checks have been carried out, the books and papers should be dealt with accordingly, i.e. preserved or destroyed.
For mutual credit and set-off to apply in a liquidation or bankruptcy there must, before the company goes into liquidation or before the commencement of bankruptcy, have been mutual credits, mutual debts or other mutual dealings between the company or the bankrupt and any creditor proving or claiming to prove in the liquidation or bankruptcy [note 5]
The object of insolvency set-off is to do substantial justice between the insolvent and any creditors. It would be unjust if the solvent party had to discharge his/her debt to the insolvent estate in full while being left only with the right to prove and thereby receive a dividend in respect of the debt due to him/her. Insolvency set-off is mandatory and cannot be excluded by agreement between the parties [note 6]
Pre-insolvency tax liabilities may be subject to the right of Crown set-off [note 7]. The Crown is regarded as a single entity in its dealings, even though various aspects of its affairs may be handled through different Government departments, e.g. prior to the merger of Commissioners of Inland Revenue and HM Revenue and Customs to form HMRC it has been held that debts owing by a company in liquidation to the Inland Revenue and the Department of Social Security may be set off against amounts due to the company from HMRC in respect of VAT refunds, because they all represent debts due to and from the Crown [note 8]. For the right of set off to apply it is not necessary for the debt to be due and payable before the insolvency date, it is sufficient that there us an obligation arising out of the terms of a contract or statute by which a debt would become payable upon the occurrence of some future event(s) [note 9]. Crown set-off also applies against amounts due to the company under contracts for the supply of goods or services, for example contracts with the Ministry of Defence.
Set off is legally required in respect of any sum due to or from HMRC irrespective of whether such sum relates to a pre-insolvency or post insolvency obligation. Any VAT refund due to or from HMRC should be agreed but not paid over to the official receiver as liquidator/trustee. HMRC should be informed of possible Crown creditors (with addresses and references where possible) and asked to deal with Crown set-off before remitting the balance, if any, to the official receiver. In this way the Secretary of State fee (payable on chargeable receipts over £2,000) will only be charged on the net amount brought to the credit of the estate.
HMRC will offer repayments of VAT to other departments for Crown set off unless the repayment is less than £500. Any credits less than the £500 limit will be repaid automatically to the insolvent estate. Crown set off takes place after all the relevant returns have been received or assessments raised and offset. Crown set off will not apply if the repayment is secured by a valid charge on book or other debts.
In cases where the order was made before 1 September 2003 where set-off is available to the Crown, amounts withheld from payment to the company in liquidation must be applied pro rata in the reduction of preferential and non-preferential liabilities [note 10]. In cases where the petition was presented on or after 15 September 2003, however, it should be remembered that there will generally be no preferential status for Crown departments following implementation of Enterprise Act 2002
For further information on the rights of set off see Chapter 40 Part 7.
Where a winding up order is made against a partnership and bankruptcy orders are made against the partners HMRC will lodge one VAT claim in the winding up proceedings for amounts due up to the date of the winding up order. This claim should stand in the joint and separate estates of all the insolvent partners.
Where a partnership becomes insolvent and no insolvency orders are made against the partners HMRC may pursue any of the partners in respect of the outstanding VAT. Where one or more partner remains solvent responsibility for rendering and paying returns remains with the solvent partner(s). HMRC may lodge a claim in the insolvency proceedings of the insolvent partner for any debts up to the date of the insolvency.
Where insolvent partners have different bankruptcy order dates HMRC will lodge individual claims in the individual estates of the partners calculated from their respective relevant dates of insolvency.
HMRC can distrain for unpaid VAT including unpaid penalties and surcharges (see paragraph 78.21) in accordance with the VAT Act 1994 and the Distress for Customs and Excise Duty Regulations 1997. Distress cannot be levied within 30 days of the final demand for payment of the outstanding tax.
If prior to the completion of the distraint a winding up petition is presented upon which a winding up order is subsequently made the court may exercise its discretion to deny the crown the benefit of the distraint. [note 11] but where the distraint is exercised without any question of unfair conduct or sharp practice or of negligence in not pursuing the company for its liabilities sufficiently promptly and where the distraint was exercised well before receiving notice of the winding up petition, it is unlikely that the court will exercise its discretion adversely to the crown [note 12].
Where a winding up order or a bankruptcy order has been made and HMRC has distrained within 3 months prior to the date of the order, the proceeds of the distraint are subject to the prior claim of the company's preferential debts to the extent that assets in the insolvency are insufficient for meeting them. [note 13].
For further information in relation to distress see Chapter 9 Part 1.