Making Tax Digital: what happens when a business becomes insolvent?

david-menzies By David Menzies, ICAS Director of Insolvency

9 February 2017

Much has been written about Making Tax Digital (MTD), but how will this affect insolvent businesses and insolvency practitioners (IPs). David Menzies looks at HM Revenue & Customs (HMRC) plans in this area.

HMRC have announced they intend to press ahead with the MTD plans following several consultation papers considering aspects of this during 2016. While some concessions have been made following the consultations, concerns remain about the cost to business of compliance and more importantly the speed at which the changes are being introduced, with MTD requirements planned to commence in April 2018.

Will MTD affect businesses which become insolvent?

Buried deep in the summary of responses to Making Tax Digital for Business (MTDfB) is some good news for IPs.

HMRC have at least recognised that businesses which become insolvent and go into an insolvency process are in a different position from businesses which are trading normally. In response to consultation question 33 on whether insolvent businesses should be required to maintain digital accounting records and report quarterly to HMRC they say:

“…the government will bring forward legislation to exempt businesses within the insolvency process from the scope of the requirement to maintain digital records and to update HMRC quarterly…”

This is in stark contrast to the approach adopted by HMRC for PAYE Real Time Information reporting (RTI) where no concessions for insolvent businesses have been introduced.

Those who responded to the consultation highlighted concerns that the inclusion of insolvent businesses within the MTDfB regime would pose practical difficulties. In particular, IPs would have difficulty accessing the digital records and tax account of an insolvent business. This could make MTDfB especially challenging.

In addition, access to accounting staff and the potential for increased costs of the insolvency process for an IP having to deal with MTDfB could reduce the amount available for distribution to creditors.

Respondents also highlighted to HMRC that there would be no benefit from submitting quarterly updates as these would have very little relevance for tax purposes. Most transactions would simply be realising assets and paying off creditors. Although in some instances there may still be an ongoing business managed by an administrator, the wide variety of possible circumstances meant mandatory adoption of MTDfB would be inappropriate.

Still a digital future?

Insolvent businesses and IPs managing their affairs are currently exempted from corporation tax and VAT online filing requirements. However, HMRC report that there was support for extending some form of online arrangements for insolvent businesses, rather than the current paper-based filing.

The importance of involving the insolvency profession in discussions on the arrangements was stressed to ensure their opinions were fully considered in the decision-making process.

The Finance Bill 2017 will in the meantime contain provisions which will exempt insolvent businesses from the MTDfB requirements. However, the exemption for insolvent businesses may be short lived.

HMRC have indicated that as the term “insolvency” covers a multitude of scenarios they believe more work is required to identify which types would be able to engage with MTDfB and those that cannot. They conclude that they will engage further with the insolvency profession with the expectation that insolvent businesses will be brought into MTDfB scope at a future date.

Topics

  • Insolvency
  • Tax

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