HMRCs Commercial Approach to the Company Voluntary Arrangement and IVA
Company Voluntary Arrangement and IVAs – HMRCs Commercial Approach
At the R3’s (The Association of Business Recovery Professionals) Small Practice Group Forum, held over 17th and 18th November 2016, HMRC gave a presentation confirming their commercial approach to company voluntary arrangement and individual voluntary arrangement proposals.
This was followed by a presentation by the HMRC Counter Avoidance Insolvency team. This article, by Stephen Evans and Hugh Jesseman, two of our Licensed Insolvency Practitioners, highlights the main points arising from the forum.
Voluntary Arrangements and HM Revenue & Customs
HMRC are often a major creditor of companies and individuals proposing a company voluntary arrangement or individual voluntary arrangement. As HMRC are an involuntary creditor and where the debtor proposes to continue trading in the voluntary arrangement (VA), HMRC have a close interest in the future tax receipts arising from the debtor, they will always vote on those proposals which are submitted to them.
In order to provide a uniform approach to their decision on whether to accept or reject VA proposals, the HMRC have a specific Voluntary Arrangement Service (“VAS”) based in Worthing. All VA proposals must be submitted to VAS rather than local tax offices. This also allows for HMRC’s experience of previous voluntary arrangements and proposals to assist their decision making process.
Due to the strict voting requirements needed to approve a VA (at least 75% of creditors voting by value at the meeting must approve), HMRC often have a casting vote and can impose modifications to the proposals.
HMRC have a range of criteria with which they examine the proposals delivered to them in order to come to their decisions. Some of these criteria are summarised in the VAS Helpsheet HMRC 11\11. HMRC have advised that this helpsheet will be revised shortly.
What is HMRC Looking For?
Primarily HMRC are looking to see that the financial difficulties are temporary ones rather than long standing issues, and will adopt an approach along the lines of “so what has changed from the past?”. Therefore the business must be viable, any business plans are expected to have been vigorously tested and realistic and necessary controls are put in place to ensure that these temporary issues can be coped with if they ever recur.
Proposals are to be supported by full and reliable financial information and debtors must be completely honest in their disclosure. The tax history of the debtor will be scrutinised for previous arrangements with HMRC, such as Time to Pay agreements, which may not have been adhered to, and to ensure that post VA tax liabilities are paid on time and in full.
HMRC are always looking to obtain the best outcome for taxpayers, but the proposals must also be optimised and achievable. HMRC will often require a VA supervisor to issue winding-up petitions or bankruptcy petitions if post VA liabilities are not settled, and to retain sufficient funds to allow for such petition to be presented.
In addition all unsecured creditors must be treated equally, and so HMRC will not look favourably on proposals which include “carve outs” of essential creditors. Finally, they allow themselves an exceptional circumstances reason for rejection, which equates to the tax history of the debtor, their opinion of individuals involved with the proposals (have they been involved in business or personal failures previously), or in corporate situations (especially when they are virtually the only creditor owed money) whether or not there is a Director’s Loan Account present.
Prior to submitting proposals it is essential that all outstanding corporation tax returns, VAT returns and real time reporting returns have been submitted. Post the approval of a VA, there will be a requirement that all returns are submitted up to the date of approval, meaning that split returns will need to be prepared and submitted. This allows HMRC to ascertain their full liability to the debtor and ensures that they receive the correct distribution during the course of the VA.
When examining the proposals, the debtor’s true financial position must be disclosed with regards to assets and liabilities(backed up by professional valuations where possible), that the open market value of assets is not materially different to the proposal, that liabilities have not been misstated , and that there is a real prospect of success.
Where there are points that are not clear, an explanation will be sought, comparable industry sources will be used to test proposals, and income and expenditure accounts critically tested, which will be expected to look at least 12 months into the future.
Often HMRC will submit a vote approving the VA but subject to the agreement of their modifications, which considering the normal weight of the HMRC’s vote, are likely to have to be considered seriously. Whilst HMRC are unable to consider draft proposals, they are willing to discuss proposals after they have been submitted and to consider further information which may assist them reach their final decision. It should also be remembered that it is possible to adjourn the creditors’ meeting for up to 14 days from the first scheduled meeting should it be necessary to provide further information or assurances to HMRC in the event of an initial rejection or request for further information in order to consider the merits of the proposal.
In summary, in the past HMRC had a reputation for not supporting VA’s, and have now taken great steps forward in order to adopt a more commercial approach in considering Company Voluntary Arrangement and Individual Voluntary Arrangement proposals, but this approach is tempered by the confidential information they might have about the debtor and the officers of the debtor.
HMRC Counter Avoidance Insolvency
Tax savings schemes have come under the scrutiny of HMRC in recent years and the current government has made it one of their primary objectives eradicate them. The Counter Avoidance team examine the various schemes that are brought to their attention with a view to ascertaining their legality and recovering any tax HMRC feel is rightfully due. HMRC have claims of £1.15 billion in the cases dealt with by this Department.
Embedded in this department is a specialist team labelled the Counter Avoidance insolvency Team (“CAI”). This team currently deals with approximately 1,500 cases, which involve an insolvency event and represent claims of approximately £344 million in total.
The HMRC approach is to issue Accelerated Payment Notices (“APN”) where they consider there to have been an avoidance of tax. The APN is designed to remove the cash advantage to a tax payer whilst the tax avoidance is investigated and potentially litigated.
An APN is an immediate demand for payment and clearly any disputes need to be raised immediately. In addition the HMRC consider the APN to be a ascertainable, quantified and liquidated debt, which is thus capable of being incorporated into a petition for a compulsory winding up, or bankruptcy.
In a large number of cases where the APN has been issued, an insolvency event has resulted because the debtor is experiencing financial difficulties. The CAI has a strategy of providing the insolvency practitioner with full information of the scheme in order to assist potential recoveries. The CAI will actively use the insolvency to disrupt aggressive avoidance schemes. The CAI are proactive in arranging for the appointment of insolvency practitioners to undertake the necessary investigations into the schemes and they will even replace insolvency practitioners in certain circumstances.
In summary the HMRC are taking an active approach against tax avoidance schemes and won’t shy away from an insolvency event if they feel that is the best option.
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