Fixed charge receivers appointed under the Law of Property Act 1925 (“LPA Receivers”) have always faced uncertainty in relation to their obligations to account for VAT incurred or collected as a result of their appointment.
As part of their role, LPA Receivers collect rents together with any VAT payable on those rents, and incur input VAT on costs incurred during their appointment, such as development costs. As agents for the borrower, this input VAT belongs to the borrower as the registered party for VAT purposes and so LPA Receivers are unable to offset or recover this directly from HM Revenue and Customs.
For a long time there has been a lack of clear guidance from HMRC regarding this issue, which has resulted in confusion for LPA Receivers. Following extensive discussions between HMRC and The Association of Property and Fixed Charge Receivers (“NARA”), which represents LPA Receivers, HMRC has recognised the difficulties that LPA Receivers face when carrying out their duties and has provided express guidance for LPA Receivers on VAT accounting.
Accounting for VAT: The Problems faced by LPA Receivers
The problems arise due to the artifice of an LPA Receiver’s appointment. Whilst LPA Receivers are appointed by the mortgagee, they are deemed to be agents of the borrower. Therefore, LPA Receivers have to decide whether their duty to the mortgagee allows them to deprive HMRC of VAT and simply pay the rent across to the mortgagee without accounting for VAT, or whether they are obliged to account to HMRC for the VAT collected because they are the agents of the borrower.
Whilst it is legally correct to hand the VAT collected back to the borrower because the borrower is the registered party, LPA Receivers still have a public duty to ensure that the correct amount of VAT reaches HMRC. The case of Sargent v C&E Commissioners CA  STI 311 confirmed that LPA Receivers are obliged to account to HMRC for any VAT which they collect in the course of their business activities but are not directly taxable as they are only dealing with VAT on behalf of the borrower.
LPA Receivers also face a number of practical problems when attempting to deal with VAT. For example, they may not know about the borrower’s option to tax and whether VAT should be charged on the rents collected or on the sale proceeds of the property in receivership. LPA Receivers are unable to opt to tax property on the borrower’s behalf and, if the borrower has disappeared or does not hold the information, the LPA Receiver may be unable to confirm whether VAT is chargeable.
LPA Receivers are also not entitled to recover the input VAT which has been incurred on their costs through their own existing VAT registration or obtain a separate VAT registration for these purposes. Instead they are expected to account for VAT through the borrower’s VAT registration. However, where a borrower is un-cooperative, and the LPA Receiver is unable to use the borrower’s VAT registration, the LPA Receiver potentially faces a situation where it is unable to recover VAT.
As a result, a number of informal solutions have been adopted by LPA Receivers with local VAT offices. The problem with this is that HMRC may either request that VAT is paid to them without any deduction for input tax, or HMRC may instruct the LPA Receiver to pay the VAT collected to the borrower so that it can be accounted for. In either case, LPA Receiver will be unable to offset the input VAT against its output VAT.
HMRC’s Guidance: The Current Position
As a result of HMRC’s discussions with NARA, HMRC have acknowledged the on-going difficulties faced by LPA Receivers when trying to decide how to account for VAT. Whilst it is still not possible for a refund of input VAT to be made to LPA Receivers, HMRC has now confirmed the following:
1. the duty to account to HMRC for the VAT collected as a result of an LPA Receivers appointment is only limited to the amount which would be payable by the borrower. Therefore, the LPA Receiver is able to offset any additional input VAT incurred on the property against the output VAT that it has collected;
2. when accounting for VAT, LPA Receivers should submit Form 833 to HMRC, with the appropriate payment; and
3. payments under the Form 833 may now be made by bank transfer.
What are the implications of HMRC’s Guidance?
It is vital that LPA Receivers do not ignore their duties and obligations in respect of VAT as the Sargent case confirmed that LPA Receivers must account for the VAT which they collect.
Whilst HMRC will still not refund input VAT to the LPA Receivers, LPA Receivers are now able to offset any input VAT against the output VAT collected when making payments to HMRC. In addition, as there are no rules which require LPA Receivers to account for VAT by reference to particular periods, LPA Receivers are able to decide their own accounting period in order to ensure they can maximise the setting off of input VAT against output VAT.
Problems remain in relation to confidentiality and how much information HMRC will provide to LPA Receivers regarding the borrower’s option to tax, and LPA Receivers should still make all enquiries they can to obtain information on the borrower’s VAT position, including asking the mortgagee, seeking copy invoices from tenants or others and calling the HMRC Helpline. HMRC may be willing to confirm or provide further information, if the LPA Receivers are able to collect a sufficient amount of detail themselves.
Discussions between NARA and HMRC are continuing as the position is still not ideal (in particular the lack of the ability to claim a refund of input VAT) but HMRC’s new guidance is a step in the right direction.
For further information, please contact James Walton or the partner with whom you usually deal.