The Enterprise Investment Scheme: What tax reliefs are available?
In his latest article, experienced Corporate & Commercial Solicitor Paul Longland answers your questions on EIS tax relief.
Crown Preference and insolvency set off
Malcolm Niekirk, Frettens' resident Insolvency Guru, looks at a technical aspect of insolvency law - and one that is sure to become more prevalent in the coming months.
The recent return of Crown Preference has implications for insolvency set off, which he addresses below.
Insolvency set off
I've been asked recently to give a really technical piece of advice. It's a problem that insolvency practitioners will run into, more and more.
Insolvency set off is mandatory. Where you have mutual dealings, and a creditor who is also a debtor, you have to net off the opposing claims into a single debt.
What if HMRC is the creditor?
But, what if the creditor is the Crown? And, suppose that part of their claim is preferential, and the rest non-preferential? Do you set off the tax refund (for example) against the preferential part first? Or last? Or do you split it across the claims?
The answer is quite simple. You split it, in proportion.
You can see a worked example below, however, as this is a fairly technical application of insolvency law, please don't hesitate to get in touch with me to discuss.
What parts of Crown debt are preferential?
The Crown debts that are preferential (ranking behind some other preferential claims, most significantly, those to employees) are:
- VAT
- PAYE
- Employee NICs
- Student loan repayments
- CIS deductions.
Other Crown debts are likely to be unsecured and non-preferential.
How do you set off Crown debts in insolvency?
In this case, the Crown is a creditor with unsecured claims that are both preferential and non-preferential. And, the Crown is also a debtor, with a VAT refund due to the company. Statutory insolvency set-off will apply to net the Crown’s claims.
The VAT refund is less than the Crown’s claims as a creditor. So, how should it be applied to the preferential and non-preferential parts of the Crown’s claim?
According to earlier legal authority, you should pro rate the set off. Part of the refund will reduce the preferential claim, and the rest will reduce the non-preferential claim.
Crown preference and insolvency set off: A worked example
| VAT refund due to the company: | £2,570 |
| Employer’s NI debt owed by the company (non-preferential): | (£2,700) |
| PAYE and Employee’s NIC owed by the company (preferential): | (£3,500) |
| Total Crown debt owed by the company (mixed, before set-off) | (£6,200) |
| Total net Crown debt owed by the company (mixed, after set-off) | (£3,630) |
| Non-preferential Crown debt (net, after set-off) (43.55%) | (£1,581) |
| Preferential Crown debt (net, after set-off) (56.45%) | (£2,049) |
Insolvency & Restructuring Solicitors near London, in Hampshire & Dorset, near Southampton and in Bournemouth, Poole, Christchurch and The New Forest
We hope you found this article useful. If you are an insolvency practitioner who would like to discuss crown preference or the adjournment trap, please do not hesitate to get in touch.
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