VAT and Insolvency

Introduction

When a business or individual enters insolvency, VAT obligations don't simply disappear. Understanding how VAT is handled during insolvency procedures is crucial for directors and business owners facing financial difficulties. This article explains who becomes responsible for VAT when insolvency occurs, how final VAT bills are calculated, and what happens to VAT registration.

What happens to VAT when insolvency begins

When a business or individual becomes bankrupt or insolvent, responsibility for VAT typically passes to the insolvency practitioner or official receiver (known as the "office holder"). These professionals take over the management of the business's affairs and become liable to account for VAT in the normal way following their appointment.

HMRC calculates the final VAT bill based on what you owe up to the day before insolvency. This date is known as the "relevant date" and varies depending on the type of insolvency procedure entered into.

How VAT registration is handled

Your insolvency practitioner will usually cancel your VAT registration once insolvency proceedings begin. However, the specific approach depends on the type of insolvency and whether the business continues to trade.

Office holders must follow specific procedures when dealing with HMRC during insolvency cases. They become responsible for ensuring VAT is accounted for correctly on any ongoing trading activity or asset sales.

Final VAT returns in insolvency

HMRC will send a paper version of the final VAT Return covering the period up to insolvency. This return cannot be completed using your online VAT account.

The VAT Return must not be signed in the usual way. Instead, you or the insolvency practitioner should write: "Completed from the books and records of [name of the company/trader]."

Any VAT Returns that weren't submitted before insolvency must be sent to the HMRC VAT Controller's insolvency team. Your insolvency practitioner may handle this for you.

When you remain responsible for VAT

There are important exceptions where you continue to be responsible for VAT obligations despite insolvency:

If you continue to trade after bankruptcy: When declared bankrupt but continuing to trade, you remain responsible for your VAT obligations.

Voluntary arrangements: If you set up a voluntary arrangement to pay off your debts (sometimes called a "trust deed" in Scotland), you remain responsible for VAT.

When entering a voluntary arrangement, HMRC will send you two paper VAT Returns covering:

• Your current VAT period up to the day before the arrangement begins
• The date of the arrangement up to the end of your next VAT period

After these two returns, you can continue using your online VAT account to submit VAT Returns as normal.

Types of insolvency procedures

Different insolvency procedures affect VAT treatment in specific ways:

Administrative receivership: An administrative receiver appointed by a secured creditor may continue trading the business if beneficial to the creditor. The relevant date for HMRC's claim is the date of the receiver's appointment.

Bankruptcy: The relevant date is the date of the bankruptcy order issued by the court.

Sequestration (Scotland): This is the Scottish bankruptcy process. If the debtor applies for sequestration, the relevant date is when sequestration is awarded. If a creditor applies, the relevant date is typically the date of the original "warrant to cite."

Creditors' voluntary liquidation: Usually relates to an insolvent company and begins with a shareholders' resolution. HMRC takes the date of the extraordinary resolution as the relevant date.

Members' voluntary liquidation: Used when a company is solvent but the members wish to wind it up. Different procedures apply compared to creditors' voluntary liquidation.

VAT on assets sold by insolvency practitioners

When office holders sell business assets during insolvency proceedings, they must account for VAT on those sales in the normal way. The insolvency practitioner becomes liable for charging and accounting for VAT on any taxable supplies made after their appointment.

This means that if an administrator or liquidator sells stock, equipment, or other business assets, VAT may be chargeable on those sales depending on the nature of the assets and the circumstances of the sale.

Contacting HMRC about insolvency VAT matters

Different HMRC teams handle different types of insolvency. Case-specific VAT enquiries should be directed to the appropriate insolvency team, quoting the VAT registration number:

• Bankruptcies and individual cases: contact the Enforcement and Insolvency Service
• Creditors' voluntary liquidations and compulsory liquidations: contact the EIS NCL team
• Members' voluntary liquidations: use the dedicated query tool and ensure all outstanding returns are submitted and debts paid before contacting the MVL team
• Company administrations: contact the EIS C team
• Company voluntary arrangements: contact the Cardiff Voluntary Arrangement Service
• Individual voluntary arrangements: contact the EIS E IVA team

The general telephone helpline number for insolvency VAT queries is 0300 322 9209, open Monday to Friday, 8am to 5pm.

Sources

• Insolvency and your VAT
• Insolvency (VAT Notice 700/56)

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.