Many IPs are aware that Dear IP Chapter 4, Article 5 gives HMRC’s opinion that you should charge VAT on bonds when recharging the estate after you have first paid the premium out of your office account. This always seemed counter-intuitive given that the original supply did not attract VAT and raised the question of whether other supplies such as insurances should also attract VAT. HMRC’s arguments relied heavily on HMRC VAT Notice 700.
As a result of the Dear IP article, our advice to clients has, for some time, been that they should charge VAT on bonds and consider doing so on other recharged expenses unless they have some pretty weighty tax advice that contradicts HMRC’s view that they feel they can safely rely on.
We have recently noticed that the Law Society has given advice on the VAT treatment of disbursements to their members. This makes interesting reading and although we are not brave enough to say that you should use it as a reason to ignore Dear IP on this point, it certainly makes the argument less clear cut than HMRC suggest it is in the Dear IP article. The Law Society article can be found by clicking here.
An informative article on the subject by Paddy Behan of Behan and Co Ltd appears in ACCA’s In Practice Bulletin. This can be found here.
Both articles focus on the treatment of legal disbursements, but many of the arguments could apply to the treatment of bond premiums and other disbursements in insolvency proceedings. For now, we’ll stick to our existing advice and suggest you charge VAT on recharged bond premiums unless you have advice from a VAT specialist that carries enough weight to support you in any argument with your regulators or HMRC.
