Update on the VAT issue in High Court enforcement

15 November 2019

Let’s start with the government’s position

This is an update to an earlier feature that you can read here.

We have a letter from the Treasury and a response to a Parliamentary Question that say’s that VAT should not be paid by debtors, but in fact, should be paid by creditors who in many cases are businesses and can reclaim this as a cost, of doing business.

We also know that the Ministry of Justice has confirmed that this is Government's position in a note to the industry association last week.

This is not a new approach to VAT as it’s exactly what happens in civil enforcement where bailiff businesses in 2014 stopped charging the debtor and started to charge the creditor due to the release of 2014 Regulations. The 2014 Regulations, that govern both industries.

There are however two different fee schedules in the 2014 Regulations but neither of them mentions VAT, unlike the old fees schedule which specifically said – Value added Tax, if payable, may be added to the fees specified. In the absence of any specific mention of VAT we should assume that without very clear words to the contrary that the Lord Chancellor did not intend for VAT to be passed on and override the normal way the tax system operates.

OK – So now let’s talk about our industries position

We have a press release from last week that say’s that our industry agrees with the Government that VAT is chargeable to creditors and not debtors.

The issue with this statement is the word ‘chargeable’. If you read the Governments response, what they actually say is VAT is payable by the creditor and not payable by debtors. So, with that in mind, what our industry is actually saying, is that, we don’t agree with HMRC’s position on VAT.

The press release goes on to clarify this further by saying - VAT is chargeable to the creditor but in some circumstances, the debtor pays it, as the claimant is entitled to recover this on top of the judgment debt. This is known as “irrecoverable VAT”.

The irrecoverable VAT position is an interesting one and if right on this point, I fear it causes larger issues.

The issues:

For the creditor to have the right to pass VAT onto the debtor they would need to give permission to the HCEO’s business and confirm that this was their chosen policy for their liability of VAT. I am not sure many creditors would burden the debtor with an additional 20% of fees if they knew they could pay it themselves, then claim it back from HMRC as a cost of doing business.

If the industry is right in that VAT can be passed on, and it can prove that it has been asked by the creditor to pass VAT onto the debtor then it then has another challenge to overcome. The Taking Control of Goods (Fees) Regulations does not seem to provide for VAT to be added onto the statutory fees.

So, if right, and VAT can be passed on, it’s probably then expected that VAT is inclusive in the fees allowed in the 2014 Regulations. This could have negative consequences and may result in the industries revenue being reduced by 20% and probably make the business of High Court enforcement unsustainable. Again, it is difficult to believe that this is what was intended by the Lord Chancellor when approving the Regulations.

What will the outcome be?

I have no idea. I would assume the Government will stick with their position as it’s a position of law, if however, the government are going to get behind the position of “irrecoverable VAT”, I fear the problem is bigger than we expected.

A sensible solution for the future would be to make VAT zero-rated for the enforcement of debts which I am sure would be supported by all.