Traders, IVAs and HMRC – Part 1

When a self employed person (trader) becomes insolvent and seeks to offer proposals to creditors for an Individual Voluntary Arrangement (IVA), HM Revenue & Customs (HMRC) is highly likely to be one of those creditors.

The insolvent trader is likely to have liabilities for tax, national insurance, VAT or overpayment of tax credits. The approach that HMRC takes may be critical to the approval or rejection of such a proposal. In the first of two articles we look at the key HMRC considerations in supporting or rejecting trader IVA proposals.

If the HMRC claim is low value – currently less than £8,000 – and trading has ceased or HMRC share of the vote is statistically insignificant then it is likely that it will abstain.

For trader proposals, the voting decision will be based on the information contained within and supporting the proposal. HMRC aim to respond within seven working days of receipt of the proposal and do not want to have to consider any proposal more than once. They expect the proposal to contain a commercial offer of repayment that is both optimal and achievable.

HMRC will routinely reject proposals where:

1. the offer is considered to be substandard
2. a statement of household income & expenditure is not provided
3. a cash flow statement for the proposed term of the IVA is not provided
4. insufficient financial and other information is provided to satisfy HMRC acceptance criteria

Even where voluntary payments are not a feature of the proposal, these criteria apply. Where additional information, not contained in the original 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 will give priority to new proposals and will not chase up by telephone information that should have accompanied the proposal in the first place. In the event of the adjournment of the Meeting of Creditors (MOC), HMRC oppose additional costs being charged for a second meeting due to the late supply of information.

HMRC will routinely support proposals where:

1. debtors are honest in their financial disclosure
2. an optimised and achievable offer is made to creditors
3. provision is made for payment of all future debts on time
4. all creditors within the same class are treated equally
5. there are no exceptional reasons for rejection

What HMRC expect to be contained within the proposals:

1. the debtor’s true position with regard to assets and liabilities
2. that the open market value of assets is not materially different from those in the proposal
3. the values being placed upon liabilities are not materially from those in the proposal
4. that the proposal has a real prospect of working

What HMRC may discuss or seek clarifications or explanations prior to the MOC:

• differences between HMRC’s knowledge of the financial position and that in the proposal
• projected income & expenditure statements
• the provisions made for payment of all statutory liabilities as they fall due within the lifetime of the arrangement
• historical information already disclosed in the proposal
• financial information that may have been excluded
• any other confidential information that influences its decision