Friday, May 12, 2017
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.