Can you Write off Tax with a CVA?
A Company Voluntary Arrangement (CVA) is a formal agreement to repay the debts of a company to its creditors over a period of time, typically three to five years. Depending on the particular circumstances, the arrangement can be made to repay all or part of the money owed. Importantly, the creditors must vote to approve the CVA so in no way are they being short-changed. In fact, they typically receive a much greater return than they would if other insolvency measures, such as a Creditors Voluntary Liquidation (CVL), were used.
But if a CVA is agreed where a proportion of the debt owing to creditors is not due to be repaid, what happens to the remaining debt? For example, if the debt is reduced by the CVA so that creditors receive 50p for every £1 of debt, what happens to the remaining 50p and how is it treated in your balance sheet?
Debts Written off are not Subject to tax
Once a company completes a CVA, it can continue to trade as normal without the previous debts and any debts that remain unpaid will be written off.
The Finance Act 1994 sets out that any debts that are written off after a properly agreed and completed Company Voluntary Arrangement are not subject to corporation tax. Instead, the debt representing the written off 50p in the above example would become revenue reserve. You should amend your accounting policies to state that the company was placed into a CVA under Part 1 of the Insolvency Act 1986.
Section 74 of the Income and Corporation Taxes Act 1988 allows relief on the release of debts where the creditor has released the debt as part of a statutory insolvency arrangement. Section 94 of the same Act prevents a credit being taxed where the release was part of a statutory insolvency arrangement.
In terms of the fees for the Nominee and the Supervisor of the CVA, these expenses are considered to be exempt supplies and so are not subject to tax. With regards to VAT, the Supervisor will send copies of the CVA expenses and the VAT can be reclaimed by the company and then repaid to the Supervisor to increase the estate funds.
How much Debt can be Written off by a CVA?
The amount of debt that can be written off by a CVA depends on the company’s financial situation and its ability to recover. CVAs must be affordable otherwise the company will default on the payments and find itself back in the same position.
To make sure the proposed repayments are realistic, you must prepare a cash-flow forecast as part of the CVA proposal. As well as being affordable for you, the payments must also be acceptable to the creditors. For that to be the case, they must receive a greater return than they would if the company was liquidated.
If a proportion of the debt is written off, the CVA could also have a greater impact on the company’s credit rating. However, a clear payment history will help to show the business’s willingness to make the payments and indicate that it is back on track.
If you want a no-obligation about any aspect of a Company Voluntary Arrangement, please get in touch with our team of advisors or call our senior consultant Sue Collins directly on 07949 969 006.