ESC 3.20 is concerned with disapplying the clawback of input tax where no payment, or only part payment, has been made for the supply but the business has entered insolvency proceedings. It has had effect since 26 November 1996 and relieves an insolvent business from making an adjustment providing the supply took place before the insolvency and the clawback becomes due after the insolvency.
When introduced by section 36(4A) of the Value Added Tax Act 1994 (“VATA”) clawback was aimed at combating avoidance and evasion schemes based on the Bad Debt Relief provisions. However, an unintended consequence was the impact it had on insolvent businesses and insolvency practitioners. Clawback would create a liability for VAT against the insolvency practitioner which the practitioner would be required to settle in preference to other debts. It was accepted that as clawback resulted from the actions of the business prior to liquidation the insolvency practitioner should not be liable for the clawback.
Since 1 January 2003 clawback has been due under section 26A. The ESC was not amended to reflect this change but it has continued to have effect as before.
This draft legislation is intended to have the same effect by inserting section 26AA into VATA. Article 2 of the draft amends s26A and inserts a new section, section 26AA, to provide that the disallowance of credit for input tax (clawback) provided for in section 26A will not apply where:
- one of the listed insolvency procedures applies after the time of the relevant supply, and
- clawback falls due after the application of the insolvency procedure,
- the commissioners have been notified of the insolvency procedure, and
- that insolvency procedure has not been annulled or ended prematurely.
Article 3 amends regulation 172H of the VAT Regulations (repayment of input tax) to provide that the obligation to reduce the VAT deduction will not apply where a person is entitled to a credit for input tax where the new section 26AA disapplies section 26A of VATA. Article 4 is a saving provision and provides that deeds of arrangement, registered before 1st October 2015, under the Deeds of Arrangement Act 1914 (c. 47), which was repealed from 1st October 2015, are included as an insolvency procedure for the purposes of the section 26AA of VATA.