Great care is naturally taken by lenders, in conjunction with insolvency practitioners, to identify the most appropriate insolvency process to use on a case-bycase basis. Primarily, consideration is given to the respective powers, duties and responsibilities of the office holder alongside the cost in each scenario but – where time permits – a good deal of value may be gained or retained by considering tax at the planning stage.

Corporation tax pitfall

Imagine a scenario where a company enters administration with a strategy for the trade to be continued by the administrator while the business and assets are marketed for sale as a going concern.

Without thought, this common scenario triggers a corporation tax pitfall. The company is obviously insolvent, which will ordinarily mean that the business has trading losses. The appointment of an administrator creates the start of a new tax period so that the realisation of assets within the administration and the trading losses pre-appointment cannot, for corporation tax purposes, be set against each other.

This problem can be particularly acute given that corporation tax is an expense of the administration, ranking ahead of a lender's floating charge. There are also circumstances where it is payable before the administrator's fees.

While it is of course recognised that the disposal of assets pre-appointment may be difficult for directors and buyers, if possible such a disposal can maximise the use of trading losses as they can be set against gains realised in the same accounting period. In addition, if there is uncertainty about the tax base of assets (i.e. profits or gains could be significant), dealing with matters pre-appointment insulates potential tax costs from recognition as expenses within the formal process.

In one case the disposal of assets preappointment led to a gain of £2m, offset by trading losses in the period. Had this been realised in the administration, tax of £580,000 would have been due with no offset for trading losses brought forward. The consequent benefit to dividends to creditors was material.

There is no rule of thumb but, if you have time to plan it, a discussion may well reap dividends through reducing corporation tax expenses.

The VAT situation

Accounting periods do not affect VAT, however, the nature of the appointment can be critical.

In an administration, the office holders manage and control the company's affairs and they have much more flexibility over the VAT position. They can, for example, 'opt to tax' any properties held by the company in order to maximise VAT recovery. In a fixed-charge receivership, however, the receiver has very limited (if any) control over the company's VAT position and invariably is not able to recover VAT incurred on maintaining or selling the assets.

In the latter circumstances, depending on the nature of VAT recoveries, the co-operation of the company will be required to maximise the VAT position for the secured creditor. If recoveries could be significant, it may be beneficial to consider appointing an administrator rather than a fixed-charge receiver. It is, however, understood that HMRC is looking to find a way to allow receivers to recover input VAT as well as accounting for output VAT.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.