Pre pack administration and possible problems with the HMRC

Pre pack administration and possible problems with the HMRC

Pre-pack administration or phoenixing can be a useful business rescue solution. However, businesses may be prevented from taking advantage of this option because of an HM Revenue and Customs requirement for a VAT deposit.

If a business is in financial difficulty, one of the solutions which may be considered is pre-pack administration (commonly known as phoenixing). Pre-pack administration enables a new company to be set up which is then used to buy the assets of the old failing business. The new company can then trade on without the burden of the old business’s debts.

The pre-pack process is normally implemented by the old company directors with the intention that they will be named as directors of the new Phoenix business. Generally this does not cause an issue. However, problems may arise where the old business has significant tax debts.

Where a director of a business has a history of non payment of tax debts, it is possible that HMRC will not grant VAT registration for any new company that they are involved in without the payment of a security deposit.

Unpaid tax debts part and parcel of phoenixing

A history of no payment of tax is of course extremely likely to occur in the case of pre-pack administration because the directors of the old business are the same as those starting the new. The old business will have been liquidated leaving behind unpaid tax debts such as VAT and PAYE which are thus associated with the directors.

It is possible that the requirement for a VAT security deposit can be avoided if the new phoenix company is set up with different directors. However, this situation is unusual as it will be the old company directors who instigate the process and want to operate the new company. As such, the requirement for a VAT deposit must be anticipated.

Value of required deposit will vary

There is no prescribed formula for calculating how much the required deposit will be. However, it is likely to be equal to the amount of VAT which would have been paid by the old business over a period of 4 to 6 months. If this sum cannot be paid, then the future of the new business will be in jeopardy as it will be illegal to trade.

It is important to stress that a VAT deposit will not always be required and will be down to the discretion of HMRC. If such a deposit is payable, this will not in itself cause a pre-pack administration process to fail as trading can commence when it is paid. However, where funds are tight it is certainly an important factor to anticipate and build into the budget requirements for the new business.