The general attitude of people to HMRC is one of healthy respect, recognizing that it is an arm of government just doing its statutory job. When financial problems begin to arise in one’s business that respect can be tinged with anxiety, even worry and occasionally fear.
A self employed trader who faces the prospect of insolvency may consider offering proposals to creditors for an Individual Voluntary Arrangement or IVA. Those creditors will almost certainly include HMRC and liabilities may include income tax and national insurance (in respect of both the trader and any employees), VAT and overpayment of tax credits. It is important that any such IVA proposal meets with HMRC’s criteria for acceptance.
Two key HMRC considerations which may be critical to the approval or rejection of the trader’s IVA proposal are compliance and viability. HMRC expect the debtor to be compliant insofar as that all statutory tax returns are up to date. That means that for example VAT returns are up to date for the last quarter and tax & national insurance returns are up to date for the last tax year. Non-compliance in regard to returns will almost certainly result in rejection of the IVA proposal. In regard to viability HMRC need to be convinced that where the IVA proposal is for the self employed trader to continue trading that there is a real prospect of the business succeeding and being viable into the foreseeable future at least during the proposed duration of the IVA. HMRC sees little point in accepting an IVA which is likely to fail within a few years leaving the debtor with further unpaid revenue liabilities.
In some circumstances HMRC abstain from voting for or against the IVA proposal at the Meeting of Creditors or MOC. One circumstance is where the HMRC claim is of low value and trading has ceased or the HMRC share of the total creditor vote is statistically insignificant. Where the only HMRC debt in the IVA proposal is in relation to the overpayments of tax credits, HMRC may also decide to abstain unless there is a suspicion of fraud relating to the overpayments.
For trader proposals, HMRC’s voting decision will be based on the information contained within and supporting the IVA proposal. HMRC aim to respond, advising of their voting intentions, within seven working days of receipt of the IVA proposal. They also make it clear that they do not want to have to consider any proposal more than once. They expect the IVA proposal to contain a commercial offer of repayment that is both optimal and achievable.
HMRC will routinely reject IVA proposals where:
- the offer is considered to be substandard
- a statement of household income & expenditure is not provided
- a cash flow statement for the proposed term of the IVA is not provided
- insufficient financial and other information is provided to satisfy HMRC acceptance criteria
Even where voluntary payments are not a feature of the IVA proposal, these criteria apply. Where additional information, not contained in the original IVA proposal, is supplied in good time to allow for its consideration, HMRC may alter its vote, but this should not be assumed. From a workload perspective, HMRC give priority to new IVA proposals and will not chase up by telephone information that should have accompanied the IVA proposal in the first place. In the event of the MOC being adjourned, HMRC oppose additional costs being charged for a second meeting due to the late supply of information.
HMRC will routinely support IVA proposals where:
- debtors are honest in their financial disclosure
- an optimised and achievable offer is made to creditors
- provision is made for payment of all future debts on time
- all creditors within the same class are treated equally
- there are no exceptional reasons for rejection
What HMRC expect from the IVA proposal:
- the debtor’s true position with regard to assets and liabilities
- the open market value of assets is not materially different from those in the IVA proposal
- the values being placed upon liabilities are not materially from those in the IVA proposal
- the IVA proposal has a real prospect of working
What HMRC may discuss prior to the creditors meeting:
- differences between HMRC’s knowledge of the financial position of the debtor and the financial position outlined in the IVA proposal
- projected income & expenditure statements
- the provisions made for payment of all statutory liabilities as they fall due within the lifetime of the IVA
- historical information already disclosed in the IVA proposal
- financial information that may have been excluded
- any other confidential information that influences its decision