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HMRC internal manual

VAT Partial Exemption Guidance

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HM Revenue & Customs
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Other Partial Exemption issues: insolvency

Insolvency: VAT on insolvency practitioners’ fees

An insolvent business is likely to incur VAT on the fees of the Office Holder appointed to oversee the insolvency. Where, however, the fees include costs charged by third parties, these should be separately identified and deducted to the extent that they are used to make taxable supplies. As the services of the Office Holder themselves do not relate to any specific supply, these fees will be a general overhead of the business concerned. A partly exempt business will suffer a restriction to input tax on its overheads.

While the business remains registered, the treatment of the input tax on the office holder’s fees as an overhead may produce a different result as outlined below.

Insolvent businesses which continue to trade

Where a business remains fully taxable it can deduct the input tax on the office holder’s own fees, as with all other overheads. Where the business sells assets and incurs exempt input tax, it will have to apply a partial exemption method in the normal way.

Where the business remains partly exempt, deduction of input tax is subject to restriction in accordance with the partial exemption method in place. A change of method should be requested from the local VAT office if, in the light of changing circumstances, the method in place no longer produces a fair and reasonable attribution of input tax to taxable supplies.

Insolvent businesses which continue to trade but which remain registered

Where the business has ceased to trade, the principle activity will be the sale of assets. The input tax incurred on the Office Holder’s fees should be considered in the light of the taxable status of the business prior to the insolvency. This is because anything done in connection with the termination or intended termination of a business is done in the course or furtherance of that business. Any third party costs should be separately attributed to the sale of the related assets.

If the insolvent business was previously fully taxable and the office holder’s fees are treated as an overhead to the business prior to insolvency, the input tax on these fees is fully deductible.

If the insolvent business was previously partly exempt and the office holder’s fees are treated as an overhead to the business prior to insolvency, the deduction of input tax on these fees will be restricted. The business should continue to use the method in place in the normal way. A change of method should be requested from the local VAT office if, in the light of changing circumstances the method in place no longer produces a fair and reasonable attribution of input tax to taxable supplies.

Change of Partial Exemption method

An insolvent business may seek approval from the local VAT Office for a change of method to calculate entitlement to input tax deduction, given that there can be a substantial change in circumstances. Our normal policy applies to any requests for retrospection in method changes.