November 2007
Introduction
i What is Value Added Tax?
Value Added Tax (VAT) is a tax charged on the final consumption of certain goods or services in the UK, and it includes goods imported into the UK. It became operative in the UK in 1973.
There are two elements of VAT and these are referred to as “input” and “output” tax. Input tax is the VAT paid to suppliers for goods and services that are purchased for the business. It is VAT on goods or services coming IN to the business. Input tax is the VAT that registered businesses can reclaim.
Output tax is the term used to describe the VAT on sales of goods or services and is the VAT on goods or services going OUT of the business. Output tax is the VAT collected from customers on each sale that is made
For more detailed guidance on which supplies VAT is chargeable and the rates applicable, see Technical Manual Chapter 78 paragraphs 78.5 - 78.7
ii Who collects VAT?
Collection of VAT is done by Her Majesty's Revenue and Customs (HMRC) which was formed on 18 April 2005, following the merger of The Commissioners of Inland Revenue and HM Customs and Excise.
HMRC collects both direct taxation (paid by individuals or businesses on income earned or capital gained) and indirect taxation (paid on money spent on services or goods.) HMRC also pays out and administers tax credits.
A company, partnership or an individual that supplies or intends to supply services over a certain turnover which are subject to VAT must be registered under the Value Added Tax Act 1994, and is known as a "trader". The trader is responsible for charging its customers the correct amount of VAT and paying it over to HMRC after deducting the amount of VAT the trader has had to pay its own suppliers.
It should be noted however, that any sale of private assets of a registered bankrupt is not in the course of business and therefore is not subject to VAT.
Please also note that the official receiver, when acting in his capacity as liquidator or trustee, is not the holder of a public office and VAT is chargeable on taxable fees or remuneration as detailed in Technical Manual Chapter 36 Part 1 (Fees and Disbursements Payable in Insolvency Proceedings).
iii How is VAT accounted for?
Depending on which scheme a trader belongs to, a trader is required at preset intervals, to complete a return and account to HMRC for the VAT input and output tax for that period .
For more details of the various schemes in operation see Technical Manual Chapter 78 paragraphs 78.13 - 78.19.
iv What action is needed for a VAT registered insolvent?
In every case where the insolvent is registered for VAT, the official receiver should complete HMRC form VAT 769 (notification of insolvency) available on LOIS (DO73), as soon as possible and indicate on the form whether deregistration is appropriate (see paragraphs vii and viii below). This form is the initial document informing HMRC of the insolvency. Every effort should be made to provide the VAT number. If this is not available the form should still be sent as HMRC will attempt to locate the case through searches. (see paragraph v below)
HMRC would prefer the VAT 769 to be sent electronically as there is less chance of the forms going astray. The completed form should be sent to insolvencyhelpdesk@hmrc.gsi.gov.uk. Forms sent by post should be sent to HMRC, VAT Operations Insolvency, 3rd Floor NW, Queens Dock, Liverpool, L74, 4AA.
v VAT Number
It is time consuming for HMRC to locate a business where the VAT number is not available on communication received so the VAT number should be included on all correspondence where possible. In exceptional circumstances HMRC may be contacted without quoting the VAT number as HMRC can, when resources permit, carry out extensive searches to locate the case in question, e-mail enquiries should be sent to insolvencyhelpdesk@hmrc.gsi.gov.uk. or alternatively HMRC can be contacted on 0151 703 8540.
Any VAT number given in the preliminary information questionnaire should be recorded on LOIS (CA03).
The official receiver can verify that the insolvent has disclosed a valid VAT number via the website of the European Commission ec.europa.eu .This website will verify the validity of a UK or other European Union member state VAT number.
vi What is deregistration?
Deregistration is the process by which a VAT registered business is removed from the VAT register with HMRC and the VAT registration number is cancelled. The VAT legislation contains provision for the deregistration in a business where the level of sales or services and tax payable is below a defined limit, the criteria for which is updated annually. Current limits are detailed in VAT leaflet 700/11 available on www.hmrc.gov.uk
Instructions will be given via LOIS(CA08) by the examiner as to whether a case is suitable for deregistration when submitting VAT 769.
vii What is automatic deregistration?
The receipt of the VAT 769 by HMRC triggers the automatic deregistration process and a VAT 167 deregistration questionnare will be issued for completion by the official receiver to establish the level of stocks and assets. .
If this form is not returned to HMRC within five weeks, a warning letter will be issued by HMRC, and if this is not responded to within seven days, deregistration automatically occurs on the eighth day.
Once deregistration has occurred, a final return form VAT 193 will be issued by HMRC covering the period from the first day after the end of the last accounting period, up to the day before the date of deregistration. The official receiver should complete and return this form to HMRC, even if it is a nil return.
In the event that deregistration has occurred and it is later ascertained that a liability or repayment does in fact exist then any tax payable or refundable may be dealt with manually by completion of forms VAT 426 (input tax) and VAT 833 (output tax) which may obtained from HMRC on request.
For further guidance see Technical Manual Chapter 78 Part 3, paragraph 78.45.
viii What if deregistration is not appropiate?
Deregistration is not appropiate where :
a) the appointment of an insolvency practitioner is envisaged; or
b) any VAT liability arising from the sale of stocks and assets exceeds/is likely to exceed VAT due of more than £1000. This currently represents gross proceeds of sale/realisations of more than £5,714. VAT on stocks and assets does not need to be accounted for to HMRC where the total VAT on them would be £1,000 or less; or
c) the business of the insolvent is being continued; or
d) an application for a stay of advertisement or proceedings, annulment, rescission or an appeal against the insolvency order has been made.
In all these circumstances it is essential that the official receiver should return the deregistration questionnaire form VAT 167, indicating the reason why deregistration is not appropriate.
ix Who should complete the VAT returns in a bankruptcy or liquidation?
Where the insolvent has traded and a VAT return has not been submitted for a pre-insolvency period the official receiver should require the bankrupt or company director to complete a return for the last business period (i.e. from the date of the last return to the date of the bankruptcy or winding-up order). This will enable HMRC to raise an accurate assessment.The official receiver as trustee/liquidator, should ensure the bankrupt or company director completes a return if:
x When will the Official Receiver have to complete a VAT return?
The official receiver may complete a pre insolvency return in the circumstances indicated above but must not sign the return and should mark it “ completed from the books and records of the company/trader ”. This, however, will not often be necessary. Post insolvency returns are issued to the official receiver as trustee/liquidator for as long as the insolvent remains registered for VAT.
The official receiver may also need to complete a return depending on the circumstances of the case, if claiming or repaying any VAT. e.g. where the sale of stock or assets realises more than £5714 and therefore the total VAT amounts to more than £1000. The official receiver does not need to account to HMRC where the total VAT is £1,000 or less.
For guidance on completion of a return form VAT 100 or VAT 193 see Procedure points 10-13 below.
xi Insolvency Practitioner cases.
If an insolvency practitioner is appointed trustee or liquidator it will be his/her responsibility to deal with VAT.
xii What is VAT Bad Debt Relief?
If a customer does not pay for goods or services supplied and the VAT output tax has been accounted for to HMRC, it may be possible to claim relief from the VAT on these bad debts.
Since the introduction of bad debt relief there have been various changes made to its availability and the way it operates. The current scheme has been in operation since January 2003. However, for earlier supplies made between 1 October 1978 and 26 July 1990 relief was only available for suppliers when their customers became formally insolvent. This scheme has now been withdrawn and any claims should be taken up with the local VAT office.
In 1990 a new scheme was introduced for supplies made after 1 April 1989. It is now no longer necessary for the customer to become formally insolvent before bad debt relief can be claimed.
If a creditor is or has been registered for VAT and wishes to claim VAT bad debt relief, they should be referred to VAT leaflet 700/18 “Relief from VAT on bad debts” available from their local VAT office.
Where the official receiver remains trustee/liquidator detailed guidance on VAT bad debt relief matters can be found in Technical Manual Chapter 78 paragraphs 78.22 – 78.24.
When dealing with dividend payments in older cases, where services were made prior to 27 July 1990, the official receiver may occasionally come across a proof of debt which has been admitted for voting/dividend purposes, excluding VAT, the VAT already having been reclaimed by the creditor through VAT bad debt relief.
xiii VAT general matters
Further information covering other areas of VAT can be found in Technical Manual Chapter 78 as follows:
Transfer of a business as a going concern – paragraph 78.25
Accounting records – paragraphs 78.26 – 78.28
Mutual credit and set-off – paragraph 78.29
Insolvent Partnerships – 78.30
Distress – 78.31
Where can I find out more?
The Insolvency Proceedings (Fees) Order 2004
VAT Act 1994
The VAT Regulations 1995
Technical Manual
Chapter 78 Value Added Tax
LOLA Desk Instructions – Receipts - Posting Remittances
www.hmrc.gov.uk - Government website dealing with collection and administration of VAT
Click HERE to view the flowchart for VAT Deregistration
Procedure
LOIS screen references are given in brackets e.g.(D073).
Deregistration
1 Where instructed by the examiner, issue form VAT 769 indicating whether deregistration is applicable. Note that if the VAT due on realisation of assets is not likely to be more than £1000 then deregistration may be allowed.
2 In an insolvency there is a procedure for HMRC to deregister automatically. On receipt of VAT 769 HMRC will issue a deregistration questionnaire VAT 167 to the official receiver for completion.
3 If this form is not returned to HMRC within five weeks, a warning letter will be issued by HMRC, and if this is not responded to within seven days, deregistration automatically occurs on the eighth day.
4 Once deregistration has occurred, a final return form VAT 193 will be issued by HMRC covering the period from the first day after the end of the last accounting period, up to the day before the date of deregistration. The official receiver should complete and return this form to HMRC, even if it is a nil return.
5 In the event that deregistration has occurred and it is later ascertained that a liability or repayment does in fact exist, then any tax payable or refundable may be dealt with manually by completion of forms VAT 426 (input tax) and VAT 833 (output tax) which may obtained from HMRC on request.
Completion of VAT return (VAT 100 or VAT 193) where VAT exceeds £1000
Please note that the boxes on form VAT 100 and 193 are the same. The VAT 193 is a final return however and is only issued once deregistration has taken place. Once a VAT 193 is received by HMRC deregistration takes place without further notice to the official receiver.
6 Once assets are sold request form VAT 100 or VAT 193 return form from HMRC (a form issued before the bankruptcy or winding-up order should not be used).
7 Obtain a copy of the main estate ledger account(ME01) and VAT Suspense Account VS01; this account holds the VAT element of any realisations made.
8 Check details of all assets realised, payments made, and the VAT charged to and by the official receiver.
9 Check that the business was not carried on by the official receiver after the bankruptcy or winding-up order. This is unusual and even then a special manager will normally have been appointed and either the special manager or an IP can be expected to deal with VAT.
Completing the return form.
10 [BOX 1] enter the total amount of VAT on assets sold
[BOX 2] enter "NONE" (unless instructed otherwise by the examiner)
[BOX 3] enter the total of box 1 and Box 2
[BOX 4] enter the total amount of VAT paid on items charged to the estate account such as the fees of the official receiver’s agents (*see note below)
[BOX 5] enter the difference between the amounts in boxes 3 and 4. If this is a positive figure then this amount must be paid to HMRC. If it is a negative figure this is the amount reclaimed from HMRC as an asset in the bankruptcy or liquidation.
[BOX 6] enter the total amount of the assets sold and any trading receipt (excluding VAT).
[BOX 7] enter the total amount of agents and professional fees and other costs of the estate excluding VAT.
[BOX 8] enter "NONE” (if shown in Box 2).
[BOX 9] enter "NONE" (if shown in Box 2).
* Note: although agents will usually account "net", deducting their charges from the sale proceeds and sending the balance, the VAT return must contain the full amount of output VAT charged to those who bought the assets, the input VAT on the full amount of the agents’ charges and the gross realisation proceeds in box 6. See LOLA Desk Instructions-Receipts-Posting Remittances-Agents fees deducted at source.
11 Complete the declaration at the end of the return for "the Official Receiver and liquidator/trustee in bankruptcy".
12 Take a photocopy for the file and send the form VAT 100 to :
HMRC, Insolvency Operations, Queens Dock, Liverpool, L74 4AF.
13 When received complete form VAT 193.
14 Enter details on LOIS (CA15,CA28).