In the last year or two, we’ve noticed a marked rise in the number of companies being asked for a deposit or bond to cover future VAT tax liabilities.
This strategy is being used in instances where HMRC believes there is a risk a company will not be able to pay its tax or duty on time. Once the security has been paid by a business, HMRC can use it to settle any unpaid tax liabilities in the future.
Schedule 11 of the VAT Act 1994 permits HMRC to demand security bonds for future VAT liabilities in cases where current businesses have failed to make VAT payments in the past, or when previous companies have gone into liquidation with outstanding HMRC debts. In the latter case, a new company with the same directors could be required to pay security.
When are existing companies asked for security?
There is a more noticeable trend where there are existing substantial tax arrears and HMRC suspects the company may be insolvent or considering insolvent liquidation they will ask for a security bond. The bond must be within a stated period for the company to be allowed to continue to trade. For example, the company will usually be told to stop making any transactions to stop increasing the VAT liability. The directors and or stated individual can be made liable personally for £5,000 for each transaction breach.
When are new companies asked for security?
When a previous business has been liquidated or sold out of administration or pre-pack administration, the directors of the new company should be aware of HMRC’s ability to demand a security deposit. However, there are a number of circumstances within which HMRC cannot ask for security.
For example, if a director has not been directly responsible for the management of the liquidated company, it is unreasonable for HMRC to require security from any new company he/she becomes involved with. Tribunals have also ruled that where the liquidation of a company has occurred for reasons outside the control of the directors, e.g. if a major customer goes bust, HMRC cannot ask for security.
There have also been rulings that prevent HMRC from demanding security in cases where the new business is financially sound and has paid its VAT returns on time and in full. In this case, if HMRC does request security you are well within your rights to challenge that request.
In every case, HMRC is supposed to make detailed enquiries into the financial position of the new company before requesting security. If HMRC fails to do this it cannot accurately assess the potential risk your new company presents. So, if you receive a demand for security but fall within one of the examples above, you should obtain professional advice and challenge HMRC.
It is critical to managing not just the closure of an insolvent company very carefully but also the start-up company too where HMRC is involved, due to their special powers.
How does the process work?
Once a potential risk has been identified, the first step HMRC will usually take is to issue an initial warning letter, before sending the company a notice of the requirement. This will set out:
- The amount of security to be paid
- The date by which the security must be given
- How long the security will be held for
- The means by which security can be given
- The consequences if you fail to provide security
- Your right of appeal
The deadline for payment of the security cannot be earlier than 30 days after the date you receive the notice of requirement. The amount of security you will be required to pay is typically six months of the estimated liability in the case of quarterly returns, and four months of the estimated liability for monthly returns. Any existing arrears will also be included.
What if you can’t afford to pay?
If you’re unwilling or unable to pay the security deposit you will have to cease trading. If you try to ignore the demand you will be committing a criminal offence by continuing to trade. The punishment for continuing to trade is a maximum fine of £5,000 for every invoice you issue without providing security. However, there is a right to appeal for an independent review of the decision.
We also advise that directors who are considering buying a company out of administration or a pre-pack, particularly those with a chequered history with HMRC, take advice from a company insolvency expert before buying the business back.
At Company Debt we can provide you with the expert advice you need to protect your interests as a company director. For more information please contact our team today or call 0800 074 6757, or click the orange live support box on the bottom right-hand side for immediate help.