Are HMRC a Creditor or Debtor in Insolvency?

Whether HMRC are a Creditor or Debtor in an Insolvency has become a bizarre sport.  One might even suggest that whether the Company owes or is owed money by HMRC is no longer relevant; Establishing what HMRC want the position to be is all that matters.

Small business owners the focus of HMRC “investigations” are becoming more frequent visitors to my door.  In the best case they have not underpaid but struggle to convince HMRC accordingly and in the worst the amount likely withheld from HMRC bears little relation to the amount they are now expected to cover. If, in a cost-of-living crisis they were not struggling before, they certainly are now!  

They are predominantly small businessmen, usually unrepresented and naive in terms of HRMC “investigation, litigation tactics and requirements.”  The result?  Massive claims that stand no prospect of being paid and a notch on the HMRC bedpost.  Apparently, another high-level fraudster has been identified and dealt with:  Deluded? I think so.  Serial large scale tax fraudsters do not run take away restaurants and certainly do not hang around long enough for the UK authorities to catch on.  

On a larger scale I have a company that billed thousands of clients for services. They paid several years in advance and the Company paid VAT on the whole amount and Corporation Tax on its profits on an actual (rather than accruals) basis.  Government policy changes put an end to the business model, albeit over a series of incremental steps as opposed to an outright ban. Insolvency followed leaving several thousand customers where VAT had been paid a significant period previously. The books and records were a bit of a mess, but once we understood what we had HMRC were approached to discuss how we might resolve the situation cost-effectively.  

This might as well have been a declaration of war:  No engagement, massive obfuscation, and threats of fraud charges against the Insolvency Practitioners. Over six years later, having been pushed back behind a case where the purpose of the business was undoubtedly questionable “because the cases were identical”, the VAT Tribunal decide that VAT is no longer reclaimable as we had not done so (effectively in the normal course of business). Therefore, unsecured creditors rights are secondary to the position of HMRC when they are paid in advice or, “VAT Legislation trumps Insolvency Legislation.  

I questioned this decision with several “experts”.  Those in the Insolvency field viewed the Liquidator duty as being to seek to reclaim overpayments.  Those with a VAT background were happy that simply claiming the recovery was VAT fraud!  Nice to know for the next time I suspect.  

In the alternative, this time a Members Voluntary Liquidation held up materially during HMRC’s Covid-19 service disintegration.  We finally achieved some progress via a personal contact we have with an HMRC employee expected by his bosses to achieve the impossible.  We were advised that, despite a Declaration of Solvency to the contrary, the Company was owed more than £80,000 in over paid tax.  

What happened next?:  I am paraphrasing about ten months of correspondence.  

Liquidator: Can we have the money?
HMRC: Of Course; well, no (albeit from a separate department)
Liquidator: Because?
HMRC: It is a large amount.  You need to explain the discrepancy.
Liquidator: But we don’t think we there is a discrepancy.  Can we have some details?
Liquidator: Pretty please?
HMRC: Alright, it is tax year one for £x and tax year two for £y.  
Liquidator: OK, I will mention this with the Directors/ Shareholders and work out what has happened.
Director: It appears that HMRC have double accounted several returns.  We confirm that we don’t think the Company is owed any money.
Liquidator: Hi there HMRC.  Apologies for this:  Looks like the is no debt.  However, It looks like it is a HMRC mistake which has cost the shareholders money.  How shall we deal with this?
HMRC: ……………….
Liquidator: Hello??
HMRC: Have £80,000

Initially I was not looking forward to the closing meeting with the Shareholders.  Now we have a happy client and a bemused Insolvency Practitioner.

If you’re a business owner and need some advice on these matters from our expert team, please do get in touch here:

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