We
were contacted by two clients yesterday with news of worrying developments at
HMRC. The first was about the possible
non-payment of final VAT reclaims to the IP, which was something that we had
already warned clients about in July last year.
The second one was a worrying change of policy in respect of interest on
outstanding tax liabilities in MVLs. Both have a potentially significant impact
on costs.
In
July last year we warned our clients of an issue that we hoped was isolated,
but could have significant ramifications if it became more common. A client in Northern Ireland had told us that
HMRC had refused to make some VAT reclaims payable to their firm at the end of
a case because of “HMRC policy”. In that case, HMRC had delayed two VAT
repayments and the IP had taken the decision to close the case with the VAT
still owed to him for the balance of his fees, so that the IP was no longer in
office by the time the VAT reclaims were agreed. HMRC refused to pay the
money to him and instead paid it to the Crown, as the company was dissolved and
they said that the money was Bona Vacantia.
Despite HMRC claiming that it was a policy decision to take that
approach, at the same time, however, we also heard from other practices that they
were still receiving final VAT reclaims made out to their firm. The funds were being paid to them even in
cases where they were no longer in office at the time the payment was made,
such that there was clearly an inconsistent approach to HMRC applying their
policy. We therefore warned clients of the potential issue, but did not
Blog about it because we did not want to risk turning an isolated issue that
might only apply in one region into a wider problem. Yesterday though, we were
contacted by a client in England and Wales where HMRC refused to pay him the
final VAT reclaim since he had closed the Administration by the time they had
finally processed the reclaim. When
querying this he was told that it was HMRC policy not to pay VAT reclaims once
the case was closed.
We
are Blogging about this now, as while one Swallow does not make a Summer, the
first client who experienced this problem was in Northern Ireland, but the one
yesterday is based in England, such that we think that it is more likely that
HMRC will start applying their “policy” across the board.
You
are permitted to get VAT reclaims payable to your firm under the VAT
regulations when you are acting as an office holder because you are treated as
the VAT registered entity’s “representative”. The problem comes, however,
if HMRC are slow in processing the VAT reclaims, such that by the time they get
around to sending you the cheque you are no longer in office. At that
stage if HMRC are aware that you are no longer in office then they are probably
within their legal rights to refuse to make the reclaim payable to your firm,
and they certainly consider that they are. To avoid being caught out by
this, you need to make sure that you have received your final VAT reclaim
before you close the case, which may mean delaying issuing final
accounts/progress reports until you have actually received the monies.
I
say, “at the moment”, since R3 are working hard in discussions with HMRC with a
view to getting them to recognise Insolvency as a separate profession, which
will then enable HMRC to introduce specific rules, systems and procedures for insolvency
cases. One suggestion being considered
is that HMRC will permit the final VAT reclaim in a case to be assigned to the
office holder’s practice, such that it will not then matter if the monies are
received after the case has been closed.
The
second HMRC related issue raised by a client is also very significant as it is
a complete change in policy that has been introduced without any prior notice
or warning to the profession.
Historically,
HMRC have always rejected any attempt to pay them statutory interest on the
late payment of tax liabilities in MVLs as they have no way of processing it. Instead they relied on the interest due under
their own late payment of tax regime, which is 2.75% rather than the statutory
interest of 8%. However, yesterday we
heard from a client that HMRC now want full statutory interest where tax
liabilities are being paid after the due date.
While that is clearly their statutory entitlement, it is still a
significant change in policy, and one that has been implemented without notice
to the profession. Apparently, as a
result of the comments made by our client, HMRC will now be contacting R3 so
that they can publicise this to the profession.
We
are not sure at this stage exactly how significant this could be. In the majority of MVLs we see,
pre-appointment planning has ensured that any tax liabilities are identified
and paid promptly, so that late payment is fairly rare. However, given the sums that can often be
involved in MVLs, even a small delay can result in significant interest, and
with current interest rates in all other areas being so low, paying 8% interest
on any such late payments could have a significant impact on the suitability of
an MVL as a solution. We decided that we
needed to tell you about this without delay, so that you can avoid it wherever
possible and manage the members’ expectations if it there is a risk that it
might not be avoided.
