A Pre Pack involves setting up a new company. Generally this is not a problem for the old company directors. However if the company being closed has HMRC debt a VAT Security Deposit may have to be paid.
- Can HMRC prevent a Pre Pack?
- Will a VAT security deposit be required?
- How much will this cost?
- Can payment of a VAT Deposit be avoided?
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Can HMRC stop a Pre Pack from being implemented?
A Pre Pack involves setting up a new company to replace the old. The old company is liquidated. The new can trade in its place debt free. As long as procedures in SIP 16 are followed creditors including HMRC are unable to prevent this.
However if the old company has VAT debts HMRC can make implementing the Pre Pack more difficult. They do this by demanding that the new company pays a security deposit before it can register for VAT.
HMRC will normally demand a security deposit if a director of a new company has previously been involved with a company that did not pay VAT owed. Pre Pack Liquidation will often involve this scenario. The old business will almost certainly have Tax and VAT debts. The directors of the old business will normally be the same as those starting the new.
A VAT Security Deposit will not always be required. It is down to the discretion of HMRC.
What does a VAT Security Deposit cost?
If a VAT Security Deposit is required this in itself should not cause a Pre Pack to fail. There will be nothing to stop the new company trading as soon as the deposit is paid. However it must be anticipated and the necessary cash made available.
The question of coursed is how much the Deposit will cost. There is no prescribed formula for calculating this. However it is likely to be equal to the VAT which would have been paid by the old business over a period of 4 to 6 months.
Can payment of a VAT Security Deposit be avoided?
If the turnover of the new company set up in a Pre Pack is likely to be greater than the VAT threshold it must be registered for VAT. Trading in these circumstances without registration is illegal. Associated directors could be disqualified and even subject to criminal proceedings.
Given the severity of trading without VAT registration a security deposit must be paid if required.
The directors of the old company should know whether or not the old company has VAT arrears which are unlikely to be paid. As such they might be able to avoid a demand for a security deposit. The way to do this would be to ensure that the new company is set up by different directors.
However this situation is not ideal. It is normally the old company directors who instigate the Pre Pack process and want to operate the new company. As such the requirement for a VAT deposit must be anticipated and budgeted for.