Insolvency ― introduction

By Tolley
  • (Updated for Budget 2020)

The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Insolvency ― introduction
  • What is insolvency?
  • Notifying HMRC that a business has become insolvent
  • HMRC claims
  • Crown set-off
  • Distraint or Taking Control of Goods (TCoG)
  • Floating charges
  • Partial exemption and capital goods scheme
  • Partnerships
  • Law of Property Act receiver
  • Transfer of a business as a going concern
  • Record retention

This notice provides an overview of the VAT treatment of insolvent businesses and the procedures that must be followed by insolvency practitioners (office holders). This note should be read in conjunction with the Insolvency ― administering an insolvent business guidance note. 

HMRC Notice 700/56 

What is insolvency?

A business will become insolvent when: 
•it does not have enough assets to cover its debts

•it is unable to pay its debts when they become due for payment

In these situations an official receiver or insolvency practitioner will be appointed to deal with the insolvent business' affairs, known as the 'office holder'. See INS1133 for a list.

There are several different types of insolvencies as outlined below:

Formal insolvencies

Administrative receivershipAn administrative receiver will normally be appointed by a secured creditor who holds a debenture agreement containing a floating, or a floating and fixed charge over the whole, or substantially the whole, of the company's assets to manage the business' affairs. The floating charges will crystallise when the administrative receiver is appointed. The administrative receiver is appointed to recover the money due to the secured creditor and if it is deemed in the best interests of the secured creditor the business will continue to trade. HMRC will regard the date that the receiver is appointed as the 'relevant date'.
BankruptcyAn individual will be regarded as bankrupt when a court has made a bankruptcy order against them. The court can declare that an individual is bankrupt on petition from that individual, or one of more of their creditors or the supervisor of an individual voluntary arrangement. The court order will state that the individual is unable to pay their debts and that certain items of their property can be sold to pay their creditors.
SequestrationThis is the bankruptcy procedure that is followed in Scotland. The petition for sequestration is presented by either a creditor or trustee acting under a trust deed. The court will issue a citation or warrant

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