The following Value Added Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:
This guidance note looks at a number of the key VAT considerations to be taken into account when administering an insolvent business.
For insolvency more broadly, see the Insolvency ― overview guidance note.
For in-depth commentary on the legislation, see De Voil Indirect Tax Service V5.187.
Broadly, partial exemption applies where a business makes a mixture of taxable and exempt supplies, and as a result may not be entitled to recover all the VAT it incurs on costs. Partial exemption is covered in the Partial exemption ― overview guidance note. Partial exemption requirements continue to apply to insolvent businesses.
In the context of insolvency, partly exempt businesses should consider whether their existing partial exemption recovery methods remain appropriate and result in a ‘fair’ recovery of input tax (given what is likely to be a significant change in circumstances). For example, a business operating the standard method (see the Partial exemption ― de minimis rules guidance note) may decide that it is appropriate to agree a special method with HMRC (see the Partial exemption ― special methods guidance note). Agreeing a fairer method of VAT recovery may ultimately help the insolvent business to maximise its VAT recovery entitlement.
HMRC confirms in its guidance that insolvent businesses may seek approval for a change in partial exemption method.
HMRC states that an insolvent partly exempt business may seek approval to end its partial exemption years at the ‘relevant date’ (see the Insolvency ― responsibility for VAT, notification and returns guidance note for discussion of the relevant date) and make an annual adjustment in the period ending with that date (for annual adjustments generally, see the Partial exemption ― annual adjustments (longer period adjustments) guidance note).
This will be worth considering for some insolvent businesses. If the annual adjustment will result in a repayment of VAT, bringing it forward
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