Fixed-charge receivers will be all too familiar with that uncomfortable feeling of needing to complete on a sale, but having no clarity on the VAT position of the property. Many will have experienced the frustration of trying to extract information from HM Revenue & Customs (HMRC) as to whether or not a commercial property has been opted to tax.
Regardless of whatever contractual protection is in place, a receiver cannot help but feel nervous that they should be collecting VAT and, if they don’t, that they may get HMRC knocking on their door if it is not collected.
But are these concerns valid? The truth is that a fixed-charge receiver is unlikely to be liable for VAT even if VAT was chargeable on a property provided that the receiver did adequate due diligence.
A fixed-charge receiver is primarily concerned with the collection of rents and sale proceeds from the property over which they are appointed, and the application of that money to the secured lender. A receiver has control over the property, but not of the wider business and affairs of the mortgagor (even though the income from the property may comprise the fundamental element of that business), and therefore, unlike an administrator or liquidator, not the tax liability of that mortgagor.
Legislation and case law
The starting position is that a fixed-charge receiver acts as an agent of the mortgagor, with any supply of goods or services being made by the mortgagor. If that supply of goods or services is VATable, any VAT should be charged using the mortgagor’s VAT registration number.
HMRC does not treat fixed-charge receivership as a form of insolvency[1] and acknowledges that a receiver is unable to be separately VAT-registered as they are merely acting as agent for the mortgagor: “[The mortgagor’s] business retains responsibility for its own VAT registration and all taxable supplies made and expenditure incurred by either it or the receiver must be accounted for on the VAT Return for the business’ registration”[2].
It follows therefore that, in the event of any liability arising in respect of VAT for a taxable supply, liability remains with the mortgagor rather than the fixed-charge receiver.
This does not mean to say that a fixed-charge receiver can give total disregard to the collection of VAT. There is a duty to account to HMRC for VAT but only where the receiver has in fact charged and collected VAT from the recipient of the supply in question.
The main case is Sargent v Customs and Excise Commissioners[3] in which the Court of Appeal confirmed that a receiver could not be treated as a taxable person and therefore was not personally liable for VAT. However, the Court of Appeal also confirmed that a receiver must be accountable to HMRC for any VAT charged and received during the course of their appointment on the following grounds:
- firstly, where a receiver has collected VAT from tenants or a buyer, that VAT has been paid to the receiver on the expectation that it would be paid over by them to HMRC, therefore it would be “dishonourable and unjust” (and therefore against public policy) for the receiver not to account for this money to HMRC. The VAT collected by a receiver should not form part of the income which is applied to the secured creditor
- secondly, the receiver owes duties to the mortgagor as well as to the mortgagee. The Court of Appeal commented that “Faced with a choice between protecting the company against the potential serious consequences to it of a failure to account to the commissioners and paying an uncovenanted bonus to the bank, the receiver could not properly exercise his discretion by taking the latter course”.
So, if a receiver has not collected any VAT then there is no obligation to account to HMRC. Panic over? Not quite. Provided that the decision not to collect any VAT is based on sound and reasonable judgement at the time, the receiver would not be expected to account to HMRC even if it transpired that VAT was chargeable and should have been collected. Making enquiries of the mortgagor, and HMRC directly[4], in good time ahead of a sale, are therefore important steps to avoid liability. Current guidance from the Association of Property and Fixed Charge Receivers (NARA) recommends that receivers should make all possible enquiries to establish the VAT status of the borrower and the property, including seeking copy rental invoices from any tenants.
If a receiver is aware that VAT is payable or flagrantly or carelessly fails to address the issue and therefore fails to collect VAT, this is the only time the receiver can foreseeably be expected to account to VAT from the proceeds of sale which would otherwise have been due to the secured creditor. Mr Creditor is unlikely to be happy.
Transfer of business as a going concern
It is possible for a sale by a receiver to qualify as a transfer of a business as a going concern (TOGC) under section 49 of the Value Added Tax Act 1994. This will usually be the situation where a let property is being disposed of, including partially let properties and properties where a lease has been agreed, but the tenant is not yet in occupation. In such cases, a sale of the property will be neither a supply of goods nor of services for VAT purposes, and there will accordingly be no VAT to account for on the sale.
To benefit from TOGC relief certain conditions must be satisfied, including:
- both the buyer and the seller must be VAT registered (or, in the case of the buyer, be required to register immediately after the transfer)
- the buyer must use the property in the same kind of business as was carried on by the seller prior to the transfer
- if the seller has opted to tax, the buyer must also exercise an option to tax in respect of the property effective before the date of the supply for VAT purposes, and the buyer must not revoke that option before the transfer.
There is, therefore, reliance on the buyer to comply with the conditions to benefit from TOGC relief (this would usually be dealt with by way of appropriate warranties in any sale contract), but there is a risk that failure to comply by the buyer will jeopardise TOGC status and trigger a VAT liability on the seller. Applying the same approach as above, provided a receiver takes all appropriate measures and complies on their part with the TOGC conditions, there will be no obligation on the receiver to account to HMRC for the uncollected VAT. It will be down to HMRC to claim the VAT from the taxable person directly, the mortgagor, who in turn will have a contractual claim against the buyer.
Accounting for VAT
Section 17 of VAT Notice 700/56[5] sets out HMRC’s views on the status of receivers and gives brief practical guidance for accounting for VAT. HMRC accepts in the Notice that a receiver’s liability to account for VAT is limited to the net amount of VAT which the mortgagor would be required to account for. This means that, from any VAT collected, the receiver is entitled to deduct input tax on eligible expenses incurred provided that the mortgagor would have been entitled to claim the same credit. Eligible expenses for this purpose are those incurred in the making of the supply in question. In the context of the sale of a property, this could include the sale agent’s fee, or conveyancing solicitor’s fees. VAT on other expenses not connected to the sale would not be deductible.
As previously mentioned, it is the mortgagor who remains the taxable person and obliged to submit VAT returns. A receiver therefore ought, as a matter of good practice, to inform the mortgagor of the amounts of output and input VAT and the supplies to which they relate. A receiver cannot make a claim for a VAT repayment on a mortgagor’s behalf (even if that income would be charged to a lender). This has to be done by the mortgagor, or by its liquidator or administrator.
Summary
Despite a common misconception that a receiver may have to account for VAT out the proceeds of sale from a property if it has not been duly collected, it would in fact be very rare for a receiver to become personally liable. The mortgagor remains the taxable person and so any liability for VAT remains with them.
Where a receiver has collected VAT from a tenant or buyer, the receiver must account for this to the tax authority, and it cannot be used towards the receiver’s own expenses or towards the debt of the appointing mortgagee.
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[1] VAT Notice 700/56, paragraph 2.5.2
[2] VAT Notice 700/56, paragraph 7.1
[3] [1995] STC 398
[4] receivers who wish to enquire whether there is an Option to Tax on a particular property should contact HMRC’s Option to Tax service
[5] https://www.gov.uk/government/publications/vat-notice-70056-insolvency
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