When a business becomes insolvent it still has responsibility for its VAT. But who deals with this, and who is responsible if things go wrong?
Insolvent business
If a business becomes insolvent its affairs will be taken over by a licensed insolvency practitioner (IP). The IP will be responsible for dealing with HMRC and will notify them of the insolvency and cancel the VAT registration when that becomes necessary.
HMRC’s latest guidance says that the registration should remain open until all trading has ceased. Quarterly or monthly VAT returns will continue to be submitted in the meantime. The returns for insolvent businesses are still submitted on paper, not electronically. These are automatically sent to the IP.
HMRC will calculate the VAT that the business owes, based on the amount outstanding at the date on which the business became insolvent. VAT will be claimed up to the day before the date of insolvency. The claim may also include penalties and interest for late or missed payments.
The insolvent business has responsibility for submitting pre-insolvency returns. However, HMRC accept that the IP may submit a return for any pre-relevant period for which the business has not rendered a return.
Once the registration is cancelled, a final VAT Return will be issued covering the period from the first day after the end of the last accounting period, up to the day before the date of de-registration.
There are various types of insolvency procedure into which a VAT registered business may enter:
- formal insolvencies;
- business rescue procedures; and
- those receiverships which HMRC does not treat procedurally as insolvencies.
Corporate insolvencies
If a company enters administration, administrative receivership or liquidation the company’s affairs will be taken over by a licensed IP from the date of that IP’s appointment. The IP will be responsible for submitting returns and paying VAT on behalf of the company.
Personal insolvency
These are handled in the same way as other insolvencies with the IP taking over your affairs and being responsible for making VAT returns and cancelling the registration. The exception to this is for voluntary arrangement, or if you have been declared bankrupt and continue to trade. In these circumstances, you will remain in control of your VAT registration and you will be responsible for declaring and paying VAT on your supplies.
Voluntary arrangements
If a company proposes a voluntary arrangement to pay off its debts an IP will help it draw up the proposal and will monitor the arrangement if it is approved. However, the business remains in control of its VAT registration and it remains responsible for accounting for and paying VAT after the arrangement is approved. Voluntary arrangements are dealt with by HMRC’s voluntary arrangement service.
When it is not an insolvency
Certain procedures are not treated as insolvencies by HMRC. These include:
- agricultural charge receivership;
- fixed charge receivership;
- Law of Property Act receivership; and
- court appointed receivership
In these cases, your VAT affairs will continue to be dealt with by the local VAT office.
Post de-registration
Once a business has de-registered for VAT it can still reclaim VAT relating to the period of registration by submitting a claim on a form VAT426 for the IP or VAT427 for the business.
Practical Tip:
Once a business enters a formal insolvency the IP takes over the VAT affairs of the business and is responsible for submitting the VAT returns. Businesses in a rescue procedure are still responsible for sending in and paying their VAT returns on time.
