Navigating VAT risks in Fixed Charge Receiverships

Tax doesn’t have to be taxing, but issues frequently arise in the context of Fixed Charge Receiverships. We consider in this article a number of those issues which arise in the context of property sales.

Can a Receiver Register for VAT purposes?

No, a Fixed Charge Receiver cannot register for VAT separately in respect of the Borrower’s business. A Receiver is a person (not necessarily an insolvency practitioner) appointed over property either under the Law of Property Act 1925 or (more likely) by a lender following enforcement of a fixed charge. A Receiver has the powers and duties specified in and limited by the Law of Property Act 1925 but these can (and are often) modified and supplemented by the security document. A Receiver is usually appointed with a view to collecting the rental income from the charged property for the lender and/or selling the charged property.

HMRC guidance makes clear that a Receiver is unable to register separately for VAT as the Receiver is appointed under a legal charge and is deemed to be the agent of the Borrower. The Borrower retains responsibility for its own VAT registration and all taxable supplies made and expenditure incurred by it (including when the Receiver is acting) must be accounted for on the VAT return under the Borrower’s registration.

Option to Tax

Sometimes establishing that the Borrower has opted to tax the property can be difficult. The fact that the Borrower was charging VAT on the rent is a good indication that the Borrower has opted, although this is of course not conclusive. It may also be worth looking at the original lending documentation and any CPs at the time. 

A Receiver does not usually have authority to make an option to tax on behalf of the Borrower as the Receiver only has responsibility over the charged property in question on behalf of the lender and does not have control of the business.

Where a Receiver provides evidence to HMRC that it has been appointed as receiver under the Law of Property Act 1925, HMRC has been known to release information to the Receiver regarding the property (but there is no entitlement to any other information regarding the Borrower’s tax affairs). This is confirmed by paragraph 17.2 of VAT Notice 700/56 (Insolvency). HMRC should, therefore, confirm whether the Borrower has made an option to tax in respect of the Property; however, this may not be a quick process, and HMRC may not always be able to provide a helpful confirmation one way or the other. 

Receiver’s Liability to account for VAT

Where the Receiver sells the charged property, paragraph 7 of Schedule 4 Value Added Tax Act 1994 deems the supply to be by the taxable person (i.e. the Borrower). However, the Receiver has an obligation to account for any net VAT it receives in respect of the property using form VAT 833. In this case, the Borrower should still record such VAT in its VAT return.

Paragraph 30 of the VAT Regulations 1995, should also be considered. This provides that where a person “dies or becomes incapacitated” and control of that person’s assets passes to another person, e.g. a receiver, liquidator or other person acting in a representative capacity, that other person shall if required and to the extent of the control of the assets, pay over VAT to HMRC. It is considered, however, that the appointment of a Receiver should not be treated as resulting in the taxable person becoming incapacitated, following Sargent v Customs & Excise [1995] STC 398. 

Sale of the Property by the Receiver

If and when the property is sold to a third party, the following points should be noted: 

1. There can be a TOGC where the seller (Borrower) is not registered for VAT.
2. If the property is opted to tax, this means that, generally speaking, VAT will need to be charged on the property since it is a standard rated supply (unless it is a TOGC, where relevant requirements have been met). 
3. The Borrower may have deregistered for VAT purposes. If the property is being transferred as part of a TOGC (assuming it is still being rented out, etc), then there generally is not an obligation to re-register for VAT. However, if the transfer is not treated as a TOGC, a number of issues potentially arise, including:

• If the reason why the sale is not a TOGC is because of something the buyer has failed to do (e.g. carrying on the property rental business), the Receiver should expect to include appropriate contractual wording to allow a claim against the buyer for any resultant loss, including any VAT that would need to be accounted for to HMRC.
• The Receiver may be required to account for VAT to HMRC. The Receiver might not, however, be able to provide a VAT invoice (or equivalent document) if the Borrower has deregistered from VAT.

Dealing with Borrower VAT Deregistration

There are different options for dealing with any deregistration by the Borrower. HMRC may accept a deferral of the deregistration date, provided this is confirmed by the Borrower or its Receiver. In other words, a letter is sent to HMRC, asking to re-visit the deregistration date and seeking HMRC’s agreement to defer the date of deregistration until the property sale completes. An alternative option would be to reregister.

In practice, HMRC has been understood to accept the use of a defunct VAT registration number on the invoice. Provided the Receiver accounts for the VAT to HMRC, the buyer should not be expected to have a VAT recovery issue.

If you would like to discuss your Real Estate enforcement strategy or require further advice on VAT in distressed situations please feel free to contact one of the key contacts below or any member of our Corporate Restructuring and Insolvency team.