Court of Appeal denies input tax on accountancy services relating to arefinancing and restructuring process: Airtours Holiday Transport Limited vHMRC5

In the past, HMRC has allowed insolvency practitioners to cancel the VAT registration of businesses at an early stage and account for VAT on any subsequent supplies using form VAT 833. HMRC has received legal confirmation that a deregistered business cannot issue a valid VAT invoice, which could result in VAT registered buyers of assets from insolvent businesses being denied claims for input tax. As a result, HMRC will no longer allow the early deregistration of insolvent businesses.

This update focusses on a range of issues affecting IPs from the past two months, covering the consultation on fees announced in February, the HMRC announced changes to the VAT deregistration regime, when accountants may be required to produce documents under Sections 235 and 256 of the Insolvency Act, and a recent Court of Appeal decision on when a company may be considered to be insolvent for the purpose of Section 238 actions

Consultation on the regulation of Insolvency Practitioners and IPs’ fees

Historically, HMRC has allowed insolvency practitioners to, at an early stage following their
appointment, cancel the VAT registration of the insolvent business. Practitioners have then been 
entitled to account for VAT on any subsequent supplies using HMRC’s form VAT 833 (Statement of 
Value Added Tax on goods sold in satisfaction of a debt).

The High Court (David Donaldson QC) has held in Enta Technologies Limited v HMRC [2014] EWHC 548 (Ch), that where a winding-up petition was brought by HMRC based on the non-payment of tax raised in assessments and the taxpayer's appeal against those assessments was pending, the winding-up court should refuse to adjudicate on the merits of the appeal and should leave that question to be dealt with by the First-tier Tribunal (Tax Chamber) ('FTT').

Background

The Court of Appeal has unanimously upheld an order refusing to strike out a claim by a “one-man” company in liquidation, which had been the vehicle for a VAT fraud, against its former directors and overseas suppliers alleged to have been involved in the fraud.

The uncertainty continues. Over the past few years, the published guidance from HMRC has given rise to doubts as to the tax treatment of debt-for-equity swaps. Whether the current legislation has supported HMRC’s position is debatable but it now appears that HMRC would like to have the legislation amended to more closely reflect its views.

HMRC v SED Essex Limited

In HMRC v SED Essex Limited [2013] EWHC 1583(Ch) the High Court has confirmed that the Court will, in appropriate cases, uphold the appointment of provisional liquidators where the petition debt is based on allegations of fraud. The case sets out the court’s approach to disputed debts, VAT assessments, and provisional liquidation in order to preserve evidence as well as assets and the application of the guidance from the Court of Appeal in Rochdale Drinks.

What the case decided and why it matters

HMRC has issued a consultation on the announcement in last year’s Budget to introduce legislation to restore HMRC’s position as a secondary preferential creditor in company insolvencies. This may impact upon pension schemes.

• Judgment was handed down in long-running bankruptcy proceedings against Kevin Stanford, a well-known businessman who founded fashion brands such as All Saints and Karen Millen (with his former wife of that name).
• The focus below is on the petition of Islandsbanki HF (“IB”).

Background

The Debtor