As you will have seen from their urgent bulletin, R3 have now received information from HMRC that services provided by IPs in connection with CVAs and Trust Deeds are also to be treated as VAT exempt, in exactly the same way as such services are in IVAs. The HMRC guidance is now that “The standard services of an Insolvency Practitioner during the administration of an IVA or a CVA are exempt as a single, composite, supply consisting of debt negotiation and payment transfers.”
This is just an initial heads up and we hope that in due course once the dust has settled the regulators and HMRC will issue some formal guidance in CVAs just as they did for IVAs. In the meantime we thought it might be helpful to provide our thoughts on the question “what should IPs do now?” Apart from anything else, this will give us something to use when responding to all of the emails and phone calls we anticipate receiving!
You should stop charging VAT on new cases and amend your engagement letters, proposal wording, covering letters and invoices to include a statement that fees for acting as nominee and supervisor in a CVA or as trustee in a Trust Deed is now being treated as VAT exempt by HMRC, but that you reserve the right to do so if the position subsequently changes.
Submit claims to HMRC for VAT going back 4 years from the date that you submit the claim for all open cases. At the same time, submit an account for the disallowable input tax arising from the partial exemption of your practice. HMRC are expected to deal with these in the same way that they did in IVAs and agree to pay the net claim. The reclaim monies received should be paid into the separate estates.
So far, so good, but what you do from there on is less certain. Should you be accounting for the gross sum reclaimed, i.e. the VAT element of your fees, or the net sum reclaimed after deducting disallowable input tax? Unlike IVAs, in CVAs there are no voting agents whose clients represent a significant % of creditors who can make a policy decision and effectively agree that remitting the net funds is acceptable. HMRC tend to be significant creditors in CVAs and we would hope that in due course the regulators will liaise with them and get their agreement, and also that of the Insolvency Service, that as a policy decision you can remit net. In the meantime though, our view is that the safest approach to take is to seek creditor approval to remitting net.
Once the money is in the estates, and subject to the above point about whether you have received it gross or net as supervisor, you should then deal with it in accordance with the arrangement terms. If your nominee’s or supervisor’s fee was approved “including VAT”, you may be able to reclaim the VAT on your fees from the estate. However if you have been allowed to account net and the estate only received 80% of the VAT reclaim after adjustment for disallowed input tax, you should only take 80% of the fee VAT.
We think that in the majority of CVAs, unlike IVAs, fees will have been quoted “excluding VAT”. This means that specific and separate fee approval is required. You cannot rely on your existing approval since you are effectively drawing fees on fees. So at the same time as seeking creditors approval to enable you to remit net you should seek a variation to the arrangement to authorise you to draw fees for dealing with the VAT reclaim. We would suggest that a fee expressed as a % of the reclaim received is an appropriate approach to take, as that way the creditors get some benefit. The fee that the main creditors agreed in IVAs was 15% subject to any existing fee cap in the approved arrangement.
For Trust Deeds it is to be hoped that the voting agents will take the same pragmatic approach as they did in IVAs, but if they do not, then you will also need to seek creditor approval as with CVAs. We suggest that anyone dealing with a significant number of Trust Deeds should contact TIX, Max Recovery and the other significant voting agents and seek to get a broad approval along the lines agreed for IVAs. As soon as we have news of the general approach by the main voters we will happily do an updated Blog article specifically for the Scots (not something I get to say often!).
Do not take any action at present as regards closed cases in CVAs and Trust Deeds since the position is not clear. This will need some guidance from the regulators, and probably Counsel’s opinion being sought as well. The position as regards closed cases is still unclear for IVAs, although we understand that R3 have now received Counsel’s opinion on the approach to take, but that the advice received has given rise to further questions, the answers to which are still awaited. By way of an update, Bill’s wild attempt to get the Insolvency Service to take the lead in a protocol-style, pragmatic approach fell on stony ground.
First it was IVAs, now it is CVAs and Trust Deeds, so are Administrations next? In particular, what about where an Administration precedes a CVA since that is a necessary precursor to, and it could be argued part of, debt negotiations on behalf of the company. For that matter, if there is an element of debt advice, negotiation and payment transfers then other case types could conceivably be caught. HMRC are reviewing the provisions at the moment and we would not be surprised to hear more in due course.
Finally, we should point out these are just our thoughts and they carry no formal weight. We have put them out to help you in your decision making and try to reduce the number of individual phone queries that we have to deal with on this subject, because we can issue this much faster than a regulator that has more formal procedures to go through before they can act. If in any doubt you should check with your regulator or seek formal legal advice.
