HMRC reminded R3 and the profession this week of its guidance on the application of the Paymex decision in IVAs and CVAs….yes….CVAs. They even went on to comment on administrations. So those of you who think that IVAs are just things that personal IPs and volume providers deal with also have to pay attention!
The gist of HMRC’s advice, which you can read in detail on R3’s website, says that Nominee’s fees are exempt, but where there is a change in supervisor or where there is a change in the company dealing with the arrangement, the supervisor’s fees become VATable at standard rate. They give several specific examples relevant to block transfers:
If the nominee and supervisor are in the same firm then their services to the debtor would comprise a single exempt supply.
Where a supervisor from a different firm is appointed either at the creditors meeting or subsequently as a successor IP then the supervisor’s fees will be standard rated.
Where a new firm acquires a portfolio of cases and a new supervisor is appointed then the supervisor’s fees will be standard rated.
Where a new firm acquires a portfolio of cases but the supervisor moves across with the cases so remains in office then the supervisor’s fees will be standard rated.
But this is all based on a very narrow interpretation of the Paymex judgement. That decision of the VAT Tribunal did not differentiate between negotiation of debts and transactions concerning payments because both are exempt, and in any event the Tribunal was happy that the IVA process was a single process that flowed seamlessly from one to the other, so was exempt throughout.
HMRC has decided that negotiation of debts is core and based its reasoning on that, thereby excluding separate supervisory work. However, given that they were so wrong in the Paymex case when they took a diametrically opposite view to that they are now expounding, can we really expect their logic to go unchallenged here?
If HMRC is right then whenever a nominee starts a case and decides, for ethical or other reasons, that a different supervisor would be appropriate, then the creditors will suffer the extra VAT or the debtor will have to pay more into the arrangement to compensate for the increased VAT burden. Similarly, if creditors want a different supervisor to act, they may not be free to make that decision because of the punitive VAT impact of changing supervisor. Although only applicable to a few of you, with many others taking a less sympathetic stance than we would, this could have a huge impact for some of the larger IVA providers who sell blocks of their back-books to firms that are more geared up for volume case supervision.
We are pretty sure that there are several counter-arguments that could be run against HMRC. For a start, although they say that a change of supervisor or a change in the company administering the IVA may break the “single composite supply” referred to in Paymex, we would argue that it does not. From the debtor’s perspective they are dealing with the same group of creditors via the same approved arrangement and the change is just administrative. From the creditors’ point of view they are still receiving substantially the same payments from the same debtor and again any change in the conduit of the funds is irrelevant. Secondly, HMRC are completely ignoring the second strand that would attract exemption, namely “transactions concerning payments”. If that area is also exempt and that is the area that the supervisor undertakes, then any change of supervisor makes no difference and the exemption continues to apply.
HMRC used their increasingly doubtful-looking logic to explain how they would treat other case types. They stated that while a stand-alone CVA would be exempt, “If the CVA is part of an exit route from administration then it is unlikely that the administrator’s activities prior to the beginning of the CVA would consist primarily of debt negotiation. The supervisor’s fees would therefore be standard rated.”. We think that this could also be wrong. We would argue that in many cases administration is commenced in order to obtain a moratorium allowing time for debt negotiation and the proposal of a CVA. There have been several high profile retail and football club CVAs where administration was initially used to buy time but the anticipated exit, even before the administration was formally commenced, was widely expected to be CVA. Many of those would potentially qualify as exempt from the commencement of the administration. In others, there is a clear point where the administrator moves from acting as administrator generally to carrying out the same role as a Nominee and potentially attracting exemption. Even if you accept the argument that a change to Supervisor might break the exemption, there is often no change between the administrator/Nominee and the Supervisor in such cases so the exemption could remain. We have even seen cases where companies moved between liquidation and CVA after a period of debt negotiation. I am not sure, however, how many corporate focussed practices would want to deal with the potential exemption of some administrations and other case types and the impact it could have on the firm’s input VAT generally. This could lead to different parts of the profession having a vested interest in different outcomes of any challenge. What may be right and necessary in volume IVAs may cause significant difficulties for practices that administer a mixed portfolio of mainly corporate cases including administrations and CVAs.
We suspect that there will be further legal action and updated advice on this subject that could affect the whole profession. At present it is likely to be driven by the needs of one or two volume IVA providers who have most to lose from the current interpretation, but the result that they obtain could have a significant impact for the profession as a whole and we would encourage R3, the regulators and the Insolvency Service to consider the wider needs of the affected stakeholders and develop a clear solution that is fit, fair and feasible, a bit like the arrangements it has to cover.
