Authorised Economic Operator Criteria - Proven Financial Solvency
Information on Authorised Economic Operator Criteria - Proven Financial Solvency.
The Authorised Economic Operator (AEO) financial solvency requirements can be met if the business can prove they have good financial standing.
Good financial standing is the ability to meet commitments to both HMRC and other creditors, and is characterised by the following criteria:
- not being subject to any insolvency procedures
- having fulfilled all obligations in respect of the payment of amounts owing to HMRC
- having demonstrated the ability to meet obligations and fulfil financial commitments to other creditors, including having no negative net assets unless where they can be covered
The criteria are considered for the 3 years up to the date of application.
If a business has traded for less than 3 years they can still apply and HMRC will consider the available evidence, which will include looking at management accounts and forecasts.
Once the status is granted the business should continue to ensure they have a positive net asset position. If there are negative net assets the business must be able to show that they are able to cover the highest negative balance over the 3 years preceding the date of reassessment as part of their monitoring programme.
HMRC will check:
- public records, such as Companies House and The London Gazette, for notification of any insolvency procedures such as administration, creditors’ voluntary liquidation or bankruptcy
- HMRC records for payment history, including whether there has been any time to pay agreement
- whether there has been any bailiff visit, or a claim against any deferment guarantee, in the last 3 years
HMRC will obtain accounts from Companies House and will check whether they were filed on time. You may be asked to provide additional financial information, such as draft accounts (if not yet filed), management accounts (for the period after the latest accounts were signed), forecasts and evidence of bank financing or shareholder support. The additional information which may be asked for depends on the circumstances.
The information should be provided for the legal entity making the application or being reassessed/monitored. It should not be consolidated with the information for any other entity.
HMRC will review the:
- disclosures in the filed accounts (and any draft accounts) to identify risks such as audit qualifications, going concern statements or contingent liabilities. HMRC may ask the business to provide further information or explanations
- balance sheet (statement of financial position), to identify the net current asset position (current assets minus current liabilities) and net asset position (total assets minus total liabilities). You may be asked to explain any significant items or trends. HMRC may ask for an explanation of any intangible assets and evidence to support their value to the business
Where the net asset position has been negative in any of the three years preceding the date of application, HMRC will ask the business to explain, and provide evidence of, how the negative position(s) are covered.
HMRC may increase the amount of cover that is required if, for example, we are not satisfied about the carrying value assets (such as intangible assets, including goodwill), or if there are significant contingent liabilities (such as unsettled legal disputes).
Cover can be provided by a financial institution, for example through undrawn bank loans or overdrafts. If this is the case, HMRC will ask the business for evidence of the terms of the facility (such as copies of agreements) and compliance with those terms (such as current and forecast utilisation). The facility must be available exclusively to the business to represent cover for AEO purposes, it cannot be a group facility shared with other businesses.
Cover can also be provided through support from another entity or individual, such as a shareholder. HMRC will need to check that the other entity or individual has enough assets to provide the amount of cover required and will ask for financial statements (for companies) or a list of personal assets and liabilities (for individuals). The support must be evidenced in a legally binding format, for example a Legal Undertaking. HMRC can provide you with the agreed Legal Undertaking template on request by emailing aeoapplications@hmrc.gov.uk.
Letters of comfort, which are often provided during an audit to support the directors’ opinion that a company is a going concern, are not legally binding and are not accepted for AEO purposes.
Alternatively, the business can take steps to improve any negative net asset position, so that cover is no longer required. An example of a step which would improve the position is the issue of share capital (if the business is a company). HMRC will consider proposals from the business and will request documentary evidence to show the steps being taken.
Letters of comfort are a written statement of intent setting out continued financial support to a business. Letters of comfort are not legally binding contractual agreements, do not constitute a legally enforceable guarantee and are not accepted for AEO purposes.
Guarantees, other than bank guarantees, are agreements between businesses. They do not give HMRC any security or commitment regarding payments and therefore do not provide HMRC with any legally enforceable rights should the business default.
Guarantees from a parent company could be taken into consideration, however this will be reviewed by HMRC accountants who can make the decision on the parent business’s ability to act as a guarantor.
Any known information that will affect solvency in the foreseeable future should also be given to HMRC as soon as it is known.