HMRC have demanded a VAT security deposit. What does that mean?

VAT Security Deposits – A Guide

If HMRC think that a company may not be able to meet its liabilities for future VAT they may ask for a VAT security deposit. This is often requested when a company has been liquidated or the business has been sold out of administration or pre-pack administration and the directors set up a new company.

HM Revenue & Customs has the power to require a security for the payment of VAT and this can be used particularly when a business has gone through insolvency and been sold to a new company. This can have a major financial impact on the new company. HMRC may also now require similar security for PAYE and NICs, although VAT remains the most common.

Some companies have been receiving letters to ask for deposits, even though they have been trading for a long time. This may well be because they have agreed a time to pay for previous liabilities or they are simply struggling with new payments.

Security may be required in the form of cash, or through an approved financial institution such as a bank providing a guarantee.

Under paragraph 4(2)(a) of Schedule 11 to the VAT Act 1994, HMRC may require any taxable entity to give security or further security for the payment of VAT that is or may become due in future. In some cases, HMRC can also issue the requirement to individuals involved in running the business, creating personal (often joint and several) liability for the security.

Circumstances where HMRC will require a deposit are where it sees a risk of non-payment of future VAT, where a person is or has been actively involved in an existing or previous business that has failed to comply with VAT obligations. HMRC is increasingly alert to repeated non-compliance or phoenix-type activity where a new company continues the trade of one that has failed.

How much might the deposit be?

HMRC would take the previous business’ VAT debts into consideration and provided the new business is similar in size to the old one, HMRC would generally calculate around 4–6 months of future VAT as being required — typically 6 months if the previous and new business pay quarterly, or 4 months if the previous or new business pays VAT monthly. This can represent a significant cash flow commitment for the new company.

Will HMRC definitely ask for a security deposit from our new company?

No, but if the previous company or directors of both the old and new company have a chequered past with regards to non-compliance with HMRC rules and have regularly not paid taxes on time, or have been involved in multiple business failures, then YES, the likelihood is HMRC will seek a security deposit.

What if we don’t pay the deposit (i.e. we cannot afford it)?

You must pay it or cease trading. If you seek to ignore the demand, it is a criminal offence to continue to trade without providing the required security and HMRC may prosecute if the deposit is not paid upon demand. Under section 37 of the Criminal Justice Act 1991 a magistrate may impose a fine of up to £5,000 for each taxable supply (i.e. each invoice) made without providing security. Each taxable supply is treated separately, so fines can escalate quickly.

There is a right of appeal to an independent review.

Summary

If considering a pre-pack administration or purchasing a business out of administration, the new company directors should carefully consider what impact this would have on its future working capital requirements. In some cases, this could throw a major spanner in the works where compliance has been poor in the past.

We suggest that directors, particularly with a chequered history with HMRC, take advice from any proposed liquidator or administrator before completing the transaction to buy the business back. It is also wise to take early advice on potential VAT or PAYE/NIC security requirements so they can be factored into the rescue plan.