The confusion dates back to Dear IP in 1991(!) which stated that Secretary of State fees are due on VAT refunds. While this is quite correct for VAT refunds since they are new realisations and therefore should be treated as assets and attract fees, it is not true for many VAT reclaims. When you reclaim VAT on your fees and expenses, and those fees and expenses have been paid from realisations that had already been deposited in the ISA, Secretary of State fees have already been charged on the initial realisation such that the reclaim should not attract fees again, otherwise it is a case of fees being charged on fees. The difference is so crucial that I will keep using italics for emphasis.
IPs have been moaning about this “injustice” for years, and we have been niggling away at it for the past few months ever since a client said that he had managed to get the fees waived on his reclaims. We are now aware of at least one more client that has been avoiding the fees for some time by sending in a separate letter each time he deposits VAT reclaims. Whilst we have not been able to find any confirmation about the ability to waive fees on the Insolvency Service website or in any other EAD notices, we are now confident enough in your ability to get fees waived that we are prepared to post a Blog article about it.
I am well known for being a bit too enthusiastic on occasions, but I have a feeling that this could be a significant amount of money and I am also pretty sure that the EAD must know that they should not have been charging fees on VAT reclaims.
I think it must be worth your while to provide EAD with a list of every payment on every open case where the monies you paid into the ISA related to a VAT reclaim. You should ask them to reimburse each estate with the fees that they have incorrectly drawn and ask them to calculate and reimburse the interest lost to the estate as a result. I suspect though that they may feel that the request for interest is a little harsh, because they may not have been able to identify at the time whether the payment was a refund or a reclaim.
I am pretty sure that those of you who have a significant number of compulsory liquidations and bankruptcies should find that your estates gain a significant boost. While I look forward to basking in the reflected glow of your gratitude when the money starts to come in and I hope that some of you will remember for long enough to put us up for next year’s Insolvency and Rescue Awards, or possibly a small knighthood, I think that there is a more important point of principle to consider.
I am concerned that a public body that is responsible for IP regulation and is supposed to be acting in the best interests of creditors, has probably been aware for some time that it may have been overcharging fees as a result of its inability to distinguish VAT refunds from VAT reclaims and yet appears to have done nothing to alert IPs to the issue. This must have cost insolvent estates many thousands of pounds to the detriment of IPs and creditors alike. At the very least I think that they should have instructed you, via Dear IP or through the regulators, to make it clear when remitting VAT funds to the ISA to indicate whether they were reclaims or refunds. If they have done so, and I have simply missed it, then I am sure someone will tell me and I’ll have to eat some humble pie. Just to make sure I have today submitted a Freedom of Information Act request to the Estate Accounts Directorate to confirm the position and I will update the blog when I have the results.
In all honesty, although at least one client thinks I am expecting too much, I really think that the Insolvency Service had a duty to be pro-active. If they knew that the treatment should be different for VAT refunds and reclaims and the source of the payment was not clear, then I think they should either have asked you on receipt of the monies, or required you to provide that information when remitting the monies, explaining why it was important. If any IP charged fees that he was not entitled to on a similar scale he would no longer be an IP and would be very much poorer as a result of the punitive fines he would have had to pay. I am quite certain that his regulator would not have been impressed with the mitigation that he wasn’t really sure if he could have the fees or not and decided to take them until someone challenged him!
I don’t know how far back you could claim and whether it would be worth restoring and/or opening closed cases to deal with this. I will leave that to the lawyers among you. However, for example, if you drew fees and expenses of £15,000, so reclaimed VAT of £2,625 at the old VAT rate, you would have been charged over £400 that you could now reclaim. I have a feeling that many cases will involve much higher sums and if you are able to reclaim the improper fees for 6 years or more, I am pretty sure that there will be some significant amounts involved. Even if you can only reclaim in respect of the present fee regime and current appointments this could soon mount up, but there may be a chance that improper fees drawn under the old fee regime in respect of voluntary liquidations where funds were banked at the ISA could also be caught. A lawyer would be able to advise on when the liability to repay the fees and therefore any period of limitation arises. It may be that you can only go back a certain amount of time from today, or it may be that as today is the date that you became aware of it, you may be able to claim all relevant fees, irrespective of when they arose, as long as you submit your claim within a limited period.
Of course, none of this may be news to you and you may well have been getting EAD to rebate fees on VAT reclaims for years, in which we would be pleased to hear from you so that we can establish just how big this issue is for the profession as a whole. However, our experience from speaking to clients is that several did not know about the ability to rebate fees, and indeed I remember a well-known IP from a mid-tier firm standing up at a training event and reminding IPs to provide for Secretary of State fees on VAT reclaims when closing a compulsory liquidation or bankruptcy where they were VAT registered.
As you’d expect from a Blog article in my name, I have taken a fairly harsh view of the Service’s approach, in much the same way that we give our clients grief when they make errors if we find them during our visits. I accept that my comments may be controversial and I would be happy to receive your feedback, ideally by email. If you don’t have my address, please feel free to follow the link on our website. If my current Freedom of Information Act request or anyone at the Service can show that the difference was publicised and I have got my facts wrong, I accept that I may yet have to edit or retract this article, but we have conducted considerable research over a protracted period and it is issued in good faith based on the information that we have gathered to date.
