2. Types of insolvency
The different types of insolvency.
Insolvency occurs when individuals or businesses:
- do not have enough assets to cover their debts
- cannot pay their debts when they become due
We refer to the official receiver, or to the insolvency practitioner appointed over an insolvent business’s affairs, as the ‘office holder’.
Office holders are liable to account for VAT in the normal way following their appointment.
There are various types of insolvency procedure which a VAT-registered business may enter.
Insolvencies are defined in law. In this handbook we have grouped them into:
- formal insolvencies
- business rescue procedures
- those receiverships which we do not treat procedurally as insolvencies
When appropriate, the date that establishes our claim in the insolvency (the relevant date) appears after the definition.
2.3.1 Administrative receivership
An administrative receiver may be appointed to manage the affairs of a company. This may be done by a secured creditor who holds a debenture agreement containing floating (or fixed and floating) charges over the whole (or substantially the whole) of a company’s assets.
Upon the appointment of the administrative receiver, the floating charges will crystallise.
The administrative receiver must treat the business assets covered by the charges in such a way as to recover the money due to the secured creditor. If the administrative receiver deems it to be in the best interests of the secured creditor, the business will continue to trade.
We take the date of the receiver’s appointment as the relevant date.
2.3.2 Bankruptcy
A bankrupt is an individual against whom the court has made a bankruptcy order.
The court can declare a person bankrupt on petition from the individual, one or more of their creditors, or the supervisor of an individual voluntary arrangement.
The order indicates that the person is unable to pay their debts and, subject to certain exceptions, deprives them of their property, which can then be sold in order to pay their creditors.
We take the date of the bankruptcy order as the relevant date.
2.3.3 Sequestration
This is the bankruptcy process of an individual, or partnership (firm) in Scotland.
If the debtor presents the petition for sequestration, then we treat the date on which sequestration is awarded as the relevant date.
The court issues a citation, or warrant, to order the debtor to appear before the court within 14 days to state their case as to why sequestration should not be awarded, if the petition for sequestration is presented by a:
- creditor
- trustee acting under a trust deed
If the debtor fails to appear, sequestration is awarded.
In such cases, we take the date of the original ‘warrant to cite’ as the relevant date.
2.3.4 Creditors’ voluntary liquidation
A creditors’ voluntary liquidation usually relates to an insolvent company and is commenced by a resolution of the shareholders.
A creditors’ meeting is called so that the creditors of the company may, if they want, appoint another insolvency practitioner in place of the shareholders’ appointee.
HMRC takes the date of the extraordinary resolution as the relevant date.
2.3.5 Members’ Voluntary Liquidation (MVL)
The directors of a company, or the majority of its directors, make a declaration of solvency.
In the declaration, the directors state their opinion that the company will be able to settle its debts in full, plus interest, within a period not exceeding 12 months of it being placed in liquidation.
The declaration must be made within the 5 weeks immediately preceding the date of the passing of the resolution for winding-up.
Liquidation takes place when the resolution is passed.
We take the date of the resolution as the relevant date.
Before entering into a MVL, suitable enquiries should be made to establish the company’s current tax position by engaging with the company’s directors and either the current or previous agent.
Where there are outstanding pre-appointment returns, about 3 months after the appointment we will advise Insolvency Practitioners, and expect those outstanding matters to be rectified as soon as practicably possible.
If an insolvency practitioner has not been notified of outstanding pre-appointment returns by 4 months after appointment, they should contact the MVL team using the contact details in this handbook at section 1.4.
Outstanding returns must be submitted using the normal channels. They should not be emailed to the MVL Team. We cannot submit an accurate proof of debt until all returns have been submitted.
To reduce the risk of a subsequent compliance check, you should allow reasonable time for HMRC to process any returns before closing your case. Before finalising the MVL, a liquidator should be satisfied that:
- all outstanding tax returns have been submitted
- debts have been paid in full together with interest
We will take appropriate action and report any conduct issues to insolvency regulators, if we believe a company has been dissolved without satisfactorily resolving its tax affairs.
HMRC does not provide tax clearance for any insolvency procedures outlined in the Insolvency Act 1986. This includes solvent and insolvent liquidations, as well as administrations.
Use of Notices of Intended Dividends (NOIDs) in an MVL
Since the end of MVL clearance, there has been an increase in NOIDs submitted by insolvency practitioners under Rule 14.29(1)(b) Insolvency (England and Wales) Rules 2016 (IR16). Our view is that the immediate issuing of a NOID on appointment in an MVL is inconsistent with Rule 14.29(1)(b) because creditors have not had the opportunity to submit a proof of debt, until a reasonable time has passed from the appointment.
Rule 14.39(a) IR16 makes it clear that in the calculation and distribution of a dividend, the office-holder must make provision for any debts which are the subject of claims which have not yet been determined. If returns have not been submitted then the IP would need to retain sufficient funds to meet HMRC’s debt.
Once established, HMRC would not expect to receive a NOID in cases where outstanding returns have not been submitted. HMRC will wait for outstanding returns to be submitted before submitting a proof of debt and will not respond to NOIDs in cases where we have provided confirmation that returns remain outstanding.
Where a NOID to HMRC is necessary because insolvency practitioners have not received a proof of debt, submit the NOID to the contact details in this handbook at section 1.4 using an individual handbook, not through listing many companies in one document. Consolidated submissions delay processing and may raise data protection concerns.
2.3.6 Compulsory winding-up
The court orders a compulsory winding-up as the result of the presentation of a petition by:
- the company
- its creditors
- its directors
- one or more of its shareholders
- the Secretary of State
We take the date of the winding-up order as the relevant date.
2.3.7 Partnership winding-up
The court orders a compulsory winding-up as a result of the presentation of a petition by:
- the members of the partnership
- a creditor
We take the date of the winding-up order as the relevant date.
2.3.8 Provisional liquidation
The court may appoint a provisional liquidator after the presentation of a petition for a winding-up in order to protect the assets of a company before a winding-up order is made.
When a provisional liquidator has been appointed, we do not treat the case as insolvency until a winding-up order is made and a ‘permanent’ liquidator appointed.
We take the date of the appointment of the provisional liquidator as the relevant date and issue the insolvency claim to the permanent liquidator.
2.4.1 Company administration
The court may appoint an administrator following an application by either the company, its directors or one or more of its creditors. In addition, an administrator may be appointed out of court by the:
- company or its directors
- holder of a qualifying floating charge
The administrator must perform their functions:
- firstly, to rescue the company
- secondly, if that is not practicable, to achieve a better result for the company’s creditors as a whole than would be achieved in a winding-up
- thirdly, if the second option is not practicable, to do their best for the secured and preferential creditors without unnecessarily harming the interests of the creditors as a whole
We take the date of the administration order as the relevant date.
You can find specific rules in relation to Corporation Tax accounting periods for companies in administration in the Company Taxation Manual.
2.4.2 Partnership administration order
The court appoints an administrator following an application by the members of the partnership or by a creditor, which is intended to allow:
- the partnership, or part of it, to survive in a restructured form
- for the approval of a partnership voluntary arrangement
- for a better realisation of the company’s assets than would be obtained from winding-up the partnership
We take the date of the partnership administration order as the relevant date.
2.4.3 County court administration order
A county court administration order is only available to individuals.
You can apply to the County Court for an administration order to stop your creditors taking any further action against you.
If an order is granted, you can make regular payments over a period of time to the court to settle your debts. The court will administer the payments between your creditors.
We take the date of the administration order as the relevant date.
2.4.4 Deceased persons’ administration order
An order made for the administration of a deceased person’s estate.
We take the date of the administration order as the relevant date.
2.4.5 Deed of arrangement
This is a method by which an individual can arrange terms with creditors.
We take the date of execution of the deed as the relevant date.
2.4.6 Scheme of arrangement
A term normally used to describe a compromise or arrangement between a company and its creditors or members or any class of them, which may involve a scheme for the reconstruction of the company.
We take the date of the creditors’ meeting confirmed by the court order as the relevant date.
2.4.7 Scottish trust deeds
A debtor grants a deed in favour of the trustee that transfers their assets to the trustee for the benefit of creditors.
We take the date the deed is signed as the relevant date.
2.4.8 Voluntary arrangements
A voluntary arrangement provides an alternative to bankruptcy or liquidation without the attached restrictions:
- The debtor makes proposals through a licensed insolvency practitioner, which are presented to a meeting of creditors. Creditors must be given 14 clear days notice of such a meeting. The proposals will usually involve delayed or reduced payment of debts, and should be advantageous to both the debtor and the creditors.
- A supervisor will be appointed to monitor the arrangement for its duration. The trader usually continues to be responsible for the business activities unless, in the case of a company, the proposal provided for either an administrator or liquidator to continue trading the company for some or all of the arrangement’s duration.
Company and partnership voluntary arrangements are similar. A moratorium may be sought preventing certain recovery actions in order to grant a breathing space for the business.
We take the date of the creditors’ meeting when the voluntary arrangement was approved as the relevant date.
For information and support with voluntary arrangements you should read the working with insolvency practitioners guidance.
2.5.1 Agricultural charge receivership
A secured creditor can appoint a receiver under the Agricultural Credits Act 1928 over the assets of a farm estate.
2.5.2 Fixed charge receivership
A receiver, or receiver and manager, is appointed by a secured creditor who holds a fixed charge over the specific assets of a business. The assets will be used for the benefit of the secured creditor.
2.5.3 Law of Property Act receivership
A lender, such as a bank, can appoint a receiver over a mortgaged property under the Law of Property Act 1925 to recover money advanced.
The receiver will usually try to arrange for the property to be sold or will be responsible for collecting rents for the mortgagee. The business may continue to trade independently of the receiver’s appointment.
2.5.4 Court appointed receivership
The court is able to appoint a receiver to collect property over which they are appointed. No property is invested in such a receiver, but their appointment acts as an injunction restraining other parties from realising assets, which the receiver has been appointed to receive.
You do not need to contact the VAT helpline to notify us of these appointments.
Law of Property Act or fixed charge receivers who want to enquire if there’s an option to tax on a particular property should contact the option to tax service.
2.5.5 Company moratorium
A company can apply for a company moratorium where it cannot pay its debts or is likely to become unable to pay its debts. Creditors whose debts fall in the pre-moratorium period are not allowed to enforce those debts while the company is in moratorium.
Any company which enters into a moratorium must pay any debts due after the company moratorium date.
VAT returns will continue to be sent as normal by us during a moratorium and we do not issue split period VAT returns for the VAT period in which a company enters into a moratorium.
All VAT returns which have a payment date on or after the date the company entered moratorium will be treated as ongoing liabilities. The company should pay those VAT returns or we may contact the company monitor to ask for the moratorium to be terminated so we can enforce our debt against the company.
All VAT returns with a payment due date before the date on which the company entered into moratorium are included. These cannot be enforced by us and are not treated as ongoing liabilities.