Accelerated Payment Notices

The Government has now given HM Revenue & Customs ("HMRC") the power to issue Accelerated Payment Notices("APNs") against entities who have entered into registered tax avoidance schemes which HMRC are seeking to challenge. 

The effect of an Accelerated Payment Notice is that the recipient entity must pay the estimated tax due under the notice in advance of any decision of the courts as to the validity, or otherwise, of the registered tax avoidance scheme.

APN's can be issued in the following circumstances:

1.  If HMRC succeeds in the courts against another scheme user it will be able to issue a APN against every other scheme user.

2.  If anyone who has used a scheme disclosable under the Disclosure of Tax Avoidance Schemes (DOTAS) rules may have to make an accelerated payment of tax – even if the planning was disclosed under DOTAS many years before these changes became law and even if HMRC has not succeeded in any litigation as regards the scheme.

Needless to say these proposals have been meet with outrage in the business community. Not least because they could have disastrous effects on an entities cashflow and cash reserves.

The purpose of this article is to give a general overview of the insolvency options available to an entity, in particular a limited company, if and when it receives an Accelerated Payment Notice.  Whilst there is not an appeal process recipients do have the right to make representations to HMRC within 90 days.  Any entity who wishes to make representations to HMRC should seek the advice of their accountant and/or tax advisor, as the purpose of this article is to explain the alternative options that might be available.

If a company has received an APN it must have entered into a registered tax avoidance scheme.  On receipt of the APN a company is likely to fall into one of three categories:

1.  The company has continued to grow and is financially strong with good profits, good cash-flow and a substantial bank balance.

2.  The company is financially strong and continues to make good profits but whilst its cash-flow is good i.e. all creditors are paid each month, there is only a small surplus available at the end of each month so it does not have sufficient cash resources to immediately pay the balance due under the APN.

3.  The company's fortunes have taken a downward turn and whilst it is still trading, it is surviving hand to mouth and has to negotiate with its creditors to keep them satisfied.

Category 1

Companies that fall into this category are not likely to require any insolvency action and will be able to simply pay the APN as and when it is received.

If HMRC succeed with their legal challenge of the scheme then they will keep the funds and if they do not, the money will simply be returned.

Whilst no doubt incredibly frustrating for the company in question it is likely to have a minimal impact on the company's finances and paying the Accelerated Payment Notice will more than likely be the most cost effective way to deal with the matter.

Category 2

Companies that fall into this category will be financially strong but simply do not have sufficient surplus cash resources to pay the APN immediately on receipt.  They could however do so over a period of time.  This is also assuming that any company falling into this category could not, or do not wish to, borrow a lump sum to pay off the APN.

Companies that fall into this category are likely to want a formal non-terminal insolvency option such as a Company Voluntary Arrangement ("CVA") which I will deal with in greater detail below.

Category 3

For companies that fall into this category any Accelerated Payment Notice is likely to be the final nail in the coffin as it were and they will need to take insolvency action.

Whilst non-terminal insolvency options such as a CVA may be appropriate, terminal insolvency options such as a Liquidation or Administration, possibly with a Phoenix Company may also be considered.

The following is a brief overview as to the various options available.

Liquidation

There are two types of liquidation, Compulsory Liquidation and Creditors Voluntary Liquidation.

Compulsory Liquidation

This is a court driven process and is normally used by a creditor to force a company into liquidation.  It can however be used by a company to place itself into liquidation.

Being a court driven process it can take some time for the Company to be placed into liquidation and clients should allow at least six to eight weeks from the date of instructing a solicitor to obtaining a Winding Up Order.

Typical solicitors costs in that regard are circa £3,500.

On the making of a Winding Up Order the Official Receiver would be appointed as Liquidator.  Given the time delays for any company to be placed into liquidation and the requirement to negotiate with the Liquidator to buy back the company's assets, a Phoenix Company within the context of a compulsory liquidation can sometimes be problematic and time consuming however it is still possible.

Creditors Voluntary Liquidation ("CVL")

By contrast, a CVL is a director lead process and is a very quick and easy way to place a company into liquidation.  Notices are signed to call meetings of the shareholders and creditors and we always seek to provide at least sixteen days notice of those meetings.

At the shareholders meeting (usually held fifteen minutes before the creditors meeting) the shareholders vote to place the company into liquidation and appoint a liquidator.

At the creditors meeting the creditors have the opportunity to appoint their own choice of liquidator.

It is sometimes possible for the director to sell the assets to a new company prior to liquidation, however that transaction would be reviewed by the appointed liquidator. Provided that all assets were purchased at market value and the statutory requirements of the Companies Act are complied with, then there is often no issue.

The director can also buy the assets of the company, including trading names etc from the Liquidator after he has been appointed, provided any such sale complies with the Liquidator's statutory duty to maximise the realisations of the Company's assets.

In contrast to a compulsory liquidation it is very easy for the directors to have a Phoenix Company.  There can however be several pitfalls with Phoenix Companies so detailed advice does need to be obtained on a case by case basis and we are always happy to provide such advice.

Administration

Administration is typically used to provide a breathing space from creditor action, for example, if bailiffs have been instructed to attend at the company’s trading premises to seize goods.  It is often possible to put a stop to such enforcement action within hours of insolvency advice being sought so Administration can be a very useful tool. Given the nature of the companies that are likely to receive Accelerated Payment Notices however, this particular insolvency process may not be relevant.

What might make an Administration an attractive option is the ability to organise a pre-packaged sale often called a pre-pack.  This is where an Administrator is appointed and the business is sold to a newly formed company immediately thereafter.

Needless to say pre-packs are not popular with creditors and guidance has been issued by the Insolvency Governing Bodies in Statement of Insolvency Practice Number 16.  Whilst there are many hoops to jump through a pre-pack is often a viable option and can provide a totally seamless transition from OldCo to NewCo.

Administration, especially with a pre-pack, is a complicated area of insolvency.  Early advice should be sought if an Administration is being considered as a significant amount of work will be required prior to appointment.

Company Voluntary Arrangement ("CVA")

There are typically two types of CVA, as follows:

1. A Monthly Payments CVA, which is where monthly payments are   made into the CVA for a period of three to five years.

2. A Lump Sum CVA, which is where a lump sum is offered to creditors in full and final settlement.

It is also possible to put forward a hybrid CVA which is a combination of monthly payments and lump sums.  Given the nature of the companies in respect of which Accelerated Payment Notices will be served upon, it is probable that the most sought after CVA would be a monthly payments one.

For companies in Category 2 the largest creditor is likely to be HMRC in respect of the APN.  Companies in Category 3 are likely to have other substantial creditors but no doubt HMRC will represent a significant percentage of creditors’ claims.

Before reviewing the viability of a CVA we would have to consider the likely reaction of HMRC to a CVA being put forward when an APN has been issued.  Given that this is a very new tool in HMRC's armoury it is currently unknown what their reaction would be to a monthly payments CVA.  If they agree to the proposal put forward by the company then there are no issues.  If, however, they choose to vote against the CVA proposal this may scupper any chances of a CVA being approved, which in turn may force an otherwise profitable trading company into terminal insolvency.

The voting rights of creditors in a CVA are set down in Rule 1.17 of The Insolvency Rules 1986 which states,

(1) Subject as follows, every creditor who was given notice of the   creditors' meeting is entitled to vote at the meeting or   any adjournment of it.

  2) Votes are calculated according to the amount of the creditor's debt as at   the date of the meeting or, where the   company is being wound up or is [in administration], the   date of its going into liquidation or (as the case may be) [when the company entered administration]

  (3) A creditor may vote in respect of a debt for an unliquidated amount, or any debt whose value is not ascertained and for the purposes of voting (but not otherwise) his debt shall be valued at £1 unless the chairman agrees to   put a   higher amount on it.  

It will therefore be important to determine whether an Accelerated Payment Notice is a liquidated and/or an ascertained debt.

An unliquidated debt is a debt in respect of which the exact value cannot be calculated from reviewing the agreed upon contractual terms.

An unascertained debt is a debt in respect of which there is no certainty that it is actually due.

It was held in RE: Mercury Tax Group Ltd (In Administration); Her Majesty's Revenue and Customs v Maxwell and Klempka [2010] that an assessment issued by HMRC was a debt that was both liquidated and ascertained.

An APN is not strictly a formal assessment but is instead a notice that money must be paid in advance.  Those monies may or may not become due subject to the success or otherwise of any legal proceedings that HMRC bring against the tax avoidance scheme.

Accordingly, it is clear that an APN is an unascertained debt because it is dependent on the success of a court case, which will may be concluded many years in the future.

In National Westminster Bank v Yadgaroff [2011] the courts held that the Chairman of a creditors meeting must seek to place a value on an unascertained debt.  Here lies the difficulty because the debt will either be nil or the full amount depending on whether HMRC win their legal challenge against the tax avoidance scheme.  It is not therefore possible to put a minimal value on that debt.

In order to form an opinion on what minimal value to ascribe to any claim made by HMRC will be fact dependant, particularly so if the Company has sought legal advice.  If legal advice has been obtained and there is a good prospect of success in defending any challenge to the scheme it seems to me inappropriate to admit the debt for the full amount when it is clearly unascertained.  Therefore it should be admitted to vote for the nominal sum of £1.

In contrast however if legal advice had been sought and that advice was that there was no prospect of defending any legal challenge or if another scheme user had been successfully challenged by HMRC then the minimal value ascribed to any claim made by HMRC would be higher than £1 and possibly the full amount.  Accordingly, this matter is highly fact dependant and will have to be reviewed on a case by case basis.

If HMRC objected to the decision they could always appeal under Rule 1.17A that the Chairman's decision to allow them to vote for £1 was incorrect.  Alternatively, they could apply to Court under Section 6 of The Insolvency Act 1986 that there has been a material irregularity at the meeting or the proposal unfairly prejudices their interests.

In my opinion, if HMRC were to challenge the Chairman’s decision, they would most likely do so under Rule 1.17A or under Section 6 (material irregularity).

As previously advised there is currently no guidance on these matters and no test cases have yet been brought.  In these circumstances, the procedure we would seek to follow, to protect the clients’ interest and our own would be as follows:

1)  If the proposal is viable then meetings of creditors and shareholders should be called to consider the proposal being put forward by the company.

2)  If the requisite majority of 75% of creditors voting vote to approve the arrangement then the proposal is approved and there would be no issues.

3)  If the requisite majority of 75% is not achieved and particularly if HMRC have voted against the arrangement for the full amount due under the APN, I would be inclined to immediately adjourn the creditors meeting for seven days.

In that seven day period I would wish to seek counsel's opinion  as to how to treat HMRC's claim in that particular case. In particular, I would wish to seek clarification as to whether their claim is unliquidated and/or unascertained and if so what value to put upon it.

4)  At the adjourned meeting counsel's advice would be followed.

5)  If HMRC then wish to challenge the Chairman's decision there could be no criticism levied at the Chairman.

Clearly, the decision as to whether to put forward a CVA or place the Company into Liquidation or Administration with a Phoenix Company would be reached after commercial consideration  is taken of the costs involved i.e. if the value of the business is significantly higher than the Accelerated Payments Notice then a Phoenix Company would not make commercial sense.  Accordingly therefore professional valuations of the company and its assets would be essential.

If you would like to discuss your Company's individual circumstances and the effects of any Accelerated Payments Notice please do not hesitate to contact Chris Parkman on 01326 340 579.