Treatment of VAT in Receiverships

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Overview

Receivers can offset VAT on costs from VAT collected relating to business activity (such as rental income) where there has been an option to tax and rents are paid including VAT.

However, Receivers cannot claim input VAT exceeding the output VAT, i.e., which results in a repayment of input VAT to the Receiver, although these sums may be carried forward.

The appointor can reclaim input VAT on costs of the sale of the property under the rules relating to VAT Bad Debt Relief, irrespective of whether or not the borrower has notified an Option to Tax on the property.

Any VAT not subject to the above continues to be treated as before.

If there isn’t any option to tax, such as residential rental properties, rent is paid without VAT and accordingly any VAT on associated costs cannot be offset and would be irrecoverable.  When posting transactions, it is therefore important to understand whether the VAT element of any expense may be offset against income and code the transaction accordingly.

Irrecoverable VAT Calculation

Irrecoverable VAT includes all VAT paid on expenses less any rental offset amounts.

During the running of a receivership, the system takes into account the greater of projected expenses or actual expenses. When calculating VAT on projected expenses the software uses the default tax code on the account to determine the VAT projected.

VAT irrecoverable is calculated by the total of VAT on expenses after adding back VAT rental offsets.

Offset VAT

The offset VAT is calculated from expenses that are in connection with the earning of revenue through trading activities, which in the context of a property receivership refers to commercial rental income.

VAT on expenses paid (output) may be offset against VAT collected for rental receipts. The amount of the VAT offset is limited by the total of VAT on rental income collected.

Tax codes for Offset VAT

In order to allow for the correct allocation of input VAT, three new tax codes have been set up for recording VAT offset on expenses for rental expenses and asset realisations:

Trading Revenue offsets

SOF STD

SOF STD.png

The ‘SOF STD’ VAT code is used to record whether the VAT element of the transaction should be used to offset VAT on rental receipts.  This is the equivalent of the existing ‘S (20%)’ VAT code.

SOF RED

SOF RED.png

The ‘SOF RED’ VAT rate of 5% is included for occasions when utility expenses need to be recorded (the equivalent of the existing ‘A’ VAT code).

Asset Sale offsets

SOF BDR

SOF BDR.png

The ‘SOF BDR’ VAT code records whether the VAT element of an expense transaction should be used to identify input VAT which can be claimed separately by the appointor as an offset against VAT on the sale of assets under the bad debt relief provisions.

What report do I view to show me the breakdown of irrecoverable VAT

The irrecoverable VAT is calculated as:

Irrecoverable VAT equals: Where do I find this figure on Tax Summary by Account report Responsible
Total VAT on all expenses Total Tax column of ‘IRRECOVERABLE’ Not recoverable by the Receiver.
Less:    
Rental Expense Offsets Total Tax column of ‘TRADING REVENUE OFFSET’ Offset by Receiver against the amounts remitted VAT to HMRC
VAT on Trading (Commercial Rental) Expenses Total Tax column of ‘REVENUE’ i.e., on VAT collected on Revenue.
(not exceeding VAT on rental income)    

View a summary of each component of the total expenses and each offset type is presented on the Tax Summary by Account EOS report.

If you want a further detail breakdown of each expenses and tax amount for each account, view the Tax Transaction Detail EOS report.

Appointor reclaimable VAT

The lender is responsible for reclaiming any asset sale expenses not exceeding the VAT on asset sales revenue.

The appointor claimable VAT does NOT reduce the Irrecoverable VAT figure reported on the EOS reports.

Asset Sales Expense Offsets calculated by:    
VAT on Asset Sales Expenses Total Tax column of ‘ASSET SALES OFFSET’ Claimable by the Lender under
(not exceeding VAT on asset sales). Total Tax column of ‘ASSET SALES REVENUE’ Bad Debt adjustment provisions.

Reconciling the irrecoverable VAT

The follow steps may assist to understand the reconciling of the Irrecoverable VAT total:

  • Ensure that both the EOS Note and the EOS Offset Note have been added to the job.
  • Run the EOS by property report with the “input taxes are recoverable” deselected.

This shows the base line irrecoverable VAT.

  • Review the Tax Summary by Account report.

If the Total Tax column of expense balances to the irrecoverable VAT on the EOS by property report, there is no need to go further.

If there is a difference, run a Tax Transaction Detail report to determine how the summary figures are arrived at.

The EOS Offset note at the bottom of the Tax Summary by Account provides further details as to how the various figures are calculated.

Entering Tax

Revenue

In accordance with the HMRC Insolvency Guidance Notice 700/56 and other guidance, advice from external parties output VAT may only be set-off in respect of business activity (such as rental income).

Entering tax for Revenue is unchanged from ‘normal data entry’.  Where tax applies to a transaction the tax codes for sales revenue and asset realisation is unchanged.

Expenses

Entering tax for expenses has changed since 2015.  The software provides the option of entering transactions that may be used to offset revenue.

Offset Expenses – Trading Revenue Offset

To record offset expenses, use the tax codes specified in the section “Tax codes for Offset VAT”.

An example of an offset entry is pictured below:

Offset entry example.png

Note

It is also important to note that, in the case of final sale proceeds being received which may include an element of rental income, the revenue transactions are coded to the correct account.

Existing entries can be amended (updated) as necessary, provided the base rate is the same, and therefore the total value of the transaction is unaltered.

Amending VAT coding in this way can also be achieved from certain reports (see the example for the ‘transaction detail’ report below) by drilling down to the transaction from reports.

Offset Expenses – Asset Sale Offset

An asset sale offset expense may be entered when realising an asset.  Use a tax code that has the asset offset tax option to record these expenses.

Tax on Projections

The default VAT code for an account is shown on the Details tab on the Edit screen for an account (Financials > Accounts > right-click {account name} > Edit {account name}):

Default tax rate.png

If an account projection exceeds the actual amount, the default tax rate for the account is used to calculate the tax amount.

VAT Calculations Projections and Actuals

Estimates of the total VAT for each account are calculated based on the VAT code assigned to each account based on the account projection entered.  The tax codes for each account is set up in the job’s chart of accounts.

As the total VAT will likely be irrecoverable unless the borrower is registered for VAT, there is an option to tax and rental income has been received, the total estimated VAT will always be shown as irrecoverable.

As each transaction is entered and the VAT allocated between either a standard VAT code or VAT offset code, the estimate of total irrecoverable VAT will be reduced by the amount of off-set VAT.

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