Often, the reason for a company’s failure is one large bad debt or a series of problems with customers and loss of profit. However, terminal losses and VAT bad debt relief are often overlooked when businesses face insolvency, especially if the business owner prepares their own returns and aren’t fully conversant with VAT rules.
However, if terminal losses and VAT bad debt relief were properly considered, it could result in increased relations for the creditors - as well as further work for accountants, too! So, if your client is facing financial difficulty and has asked you to explore insolvency options, read on to find out more about relief from the VAT on bad debt and how to claim for terminal loss relief.
Review taxes for possible claims
A global review of taxes should always be considered when advising your client about insolvency options. If you feel there may be a possibility of a claim of any sort, it should be brought to the attention of the insolvency practitioner as soon as possible. In fact, to ensure maximum relief is obtained, the following issues should be considered prior to any insolvency procedure:
- Key dates for tax purposes
- Any corporation tax paid in the three of four years prior to insolvency
- All tax allowances and reliefs
- The types of charges held
- Any assets to be sold by the insolvency practitioner (possible gains)
- Whether there will be a transfer or business or sale of assets
- If the company is part of a group, and if so, the other members of that group
- The possibility of deferring liabilities
- The accounting standards adopted
- The centre of main interest (COMI)
- Place of registration of the company
Crown set off
When a company goes into liquidation, according to the Insolvency Act 1986, an account is taken of the mutual dealings between the business and its creditors. As such, when a business is facing insolvency, Crown set off will always need to be considered. If the company has a large tax liability for VAT or PAYE, all debts owed to and from the Crown should be added up and assessed before any work is started to reach a net balance, as the insolvency practitioner has to ensure a tangible benefit to the estate.
Terminal Loss Relief
A sometimes overlooked loss relief is available to companies that have ceased trading and made losses in the last 12 months. If your client’s company or organisation stops trading, they might be able to claim Terminal Loss Relief. The relief allows for your client to carry back any trading losses that occurred in the final 12 months of trading, and set them off against any profit made in the three years up to the period when the loss was made. Any loss must be offset against the profits of most recent years first, before it can be carried back to earlier years, and losses must also be offset in the order they were made, starting with the earliest. Terminal Loss Relief is a complicated process and more information is available in the HMRC Company Taxation Manual
Relief from VAT on bad debts
If your client has supplied goods or services to a customer but wasn’t paid, they may be able to claim relief from VAT on any bad debts that have been incurred. As long as your client meets all the conditions and has made supplies to customers on or after 1st April 1989, they can claim for VAT bad debt relief, whether the payment due was in money or in goods or services to be provided in a barter. However, your client will need to wait at least six months from the later of when payment was due and payable and the date of supply. They cannot claim on a return for an accounting period earlier than the one in which they become entitled to the relief. Further guidance is available from the government here.
If your client is facing insolvency and you need help and advice on the different options available, be sure to contact McAlister & Co today. Whatever your client’s situation, with a combined knowledge of over 100 years, our dedicated team is on hand to deliver advice. Your clients will be in safe hands with us - so get in touch today to find out more.