HMRC warns not all IVAs are VAT exempt

BATTLE LINES have been drawn between the taxman and insolvency practitioners over whether VAT should be paid on fees accrued when conducting a personal insolvency procedure.

Earlier this year debt advice business Paymex won a landmark battle against HM Revenue & Customs over its VAT exemption on advice given on an Individual Voluntary Arrangement (IVA). An IVA involves an insolvency practitioner consolidating an individual’s debts and arranging a repayment plan over a set period of time (usually 5 years) then supervising the repayments.

The ramifications of the case has sent a shockwave across the profession because it could mean HMRC may have to reimburse practitioners for past VAT payments and that future IVAs will be exempt.

According to the judgement, Paymex’s supervisory role should have been VAT exempt.

HMRC and recognised professional bodies, which licence practitioners (IPs), issued guidance on the ruling at the time in June this year. However, the taxman decided it would flex its muscles recently with a cautionary line to IPs thinking of making a claim.

The guidance issued on 20 September from HMRC said: “If the IP chooses not to ‘disturb the past’, HMRC will not disturb it either.

“It is entirely a matter for the IP whether to claim a refund under Section 80 of the VAT Act or not.”

The sinister tone is not lost on the profession, with insolvency partner saying it is clearly a threat against making claims. HMRC’s aggressive stance set out in the latest guidance will make IPs think twice about historic claims they may want to pursue.

Considering there have been 48,406 IVAs arranged over the past 12 months the taxman could be faced with a multitude of claims from practitioners.

However, HMRC is warning insolvency practitioners if they are filing a VAT exemption then they need to ensure the nature of their claim is covered by the Paymex case.

Judge Roger Berner said, in the Paymex case, the supply of services provided in the IVA was not debt collection but instead supervisory, so was VAT exempt.

He claimed negotiating with creditors, handling payments and supervising the IVA ensuring its success meant services of this nature were VAT exempt under European legislation.

“We do not consider that it is necessary for us to decide as between negotiation and payment handling which is the dominant element of the supply. Both are exempt,” said Berner.


Gerald Carey, chairman of ClearDebt, an IVA provider, said following the ruling it was hoping to make a claim of more than £850,000.

“As a result of the ruling, we have put a protective claim into HMRC to recover net output tax of some £850,000 incorrectly paid to HMRC over the past 4 years. A proportion of this may be due to us and a proportion due to creditors.”

Although HMRC will not comment on a claim that is being processed, all eyes will be on ClearDebt to see how aggressively the taxman will fight the claim.

In the end the insolvency practitioner, who must deal with HMRC on an almost daily basis to negotiate on both personal and corporate insolvencies, will need to weigh up whether or not they want to make an enemy out of a very important and worthy adversary. 

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