Receiver Transactions – practical tax issue
A receivership involves the formal appointment of someone other than the owners/directors to take control of the assets and perhaps the business with the broad aim of preserving and realising the assets for the benefit of the creditors. A receiver typically acts for a particular creditor, usually a bank.
The tax implications of receivers can raise some very unique issues for tax practitioners and in particular in respect of property receiverships, there are certain aspects of tax legislation in this area which can have penal tax consequences.
One example is where a receiver is appointed over property which is subject to a mortgage and rental income is receivable. In that case the Lender is responsible for the tax (under section 96(3) of the Tax Consolidation Act 1997). However, the tax liability and tax rate is calculated based on the Borrower’s circumstances.
This will give rise to practical difficulties whereby the lender does not have information about tax deductions of the borrower and so in principle the lender may be taxable on the full rental income at the borrowers marginal rate of tax without being in a position to claim the tax deductions which would be available had the borrower been assessed. The key challenge therefore for receivers is in obtaining sufficient information to enable the correct amount of tax to be paid in relation to income and gains arising from property during the receivership period.
Recognising this and other practical difficulties the Department of Finance and the Revenue Commissioners issued a joint consultation document in July 2012 in which certain proposals were put forward to deal with the practical difficulties.
A number of submissions were made by interested parties including the Consultative Committee of Accountancy Bodies in Ireland (CCAB-I). However, according to Revenue there was no common proposal in the submissions or a clear indication of the approach required by practitioners.
New proposed legislation to deal with receiverships, which was drafted in September 2013, has not progressed. Consultation with Revenue is ongoing and guidance on the various matters is expected.
Typical Tax issues on appointment of a receiver over Property
The appointment of a receiver does not, of itself give rise to any immediate tax consequences. It does not result in a discontinuance of the business or the end of an accounting period for tax purposes.
Tax on Rental Income
As a receiver will have control of rental income the receiver will usually be tasked with calculating the tax liability in respect of rental income arising from a mortgaged property. Under current legislation the liability will be computed as though it were that of the mortgagor. This can give rise to some practical issues for the receiver, as outlined in the introduction. The strict position, according to Revenue, is that the tax should be assessed and paid over to the tax authorities based on the information available, if the personal tax information of the mortgagor is not available. In the absence of information this can give rise to a penal level of tax being paid on the rents. For example the borrower may have been entitled to capital allowances, losses or other reliefs.
Tax Based Investments and Claw Back of Allowances
In the current climate many investors are seeking to exit their tax based investments before the tax life of the asset has expired. This can lead to harsh treatment in some cases where there is a large claw back on the disposal of the asset. A claw back of capital allowances on rented property would be assessed to tax as rental income at the marginal rate of tax of an individual investor and will also be subject to the Universal Social Charge. A receiver or the bank may be responsible for this tax in respect of the property on the basis that it is treated as rental income as above. This is delaying disposal strategy in certain cases.
Receiver Liable to Tax on Disposal of Assets
Where there is a disposal of assets the receiver will be liable for capital gains tax and (VAT where applicable), in respect of all disposals made. Receivers fees, fixed charge and floating charge holders should be discharged out of the proceeds received on the sale of the assets and wind up of the business. If the debenture holders have a floating charge, the receiver must take account of preferential claims before making any distribution to the debenture holders.
Under section 571 of the Taxes Consolidation Act 1997 an “accountable person” includes “any person entitled to an asset by means of security or to the benefit of a charge or encumbrance on the asset or, as the case may be, any person appointed to enforce or give affect to the security, charge or encumbrance.” Therefore, the CGT is due on the disposal of an asset by an accountable person i.e. the receiver and is computed as if the receiver had indeed made the disposal.
Tax is assessable under Case IV of Schedule D as income of the year in which the disposal occurs and is recoverable out of the proceeds on the sale. When calculating the chargeable gain/loss, losses forward/current year loss, the personal annual allowance, the base cost of the asset and indexation relief if applicable, should be borne in mind.
Where there have been disposals of assets by the receiver and by the company in an accounting period within the period of the receivership, it will be necessary to identify the part of the total corporation tax liability which must be paid by the receiver as an accountable person.
Cessation of the Trade
Where a receiver is appointed over land and buildings which are treated as trading stock for tax purposes he may be able to mitigate tax arising on rental income for example by offsetting losses arising from a diminution of the value of the trading stock. In addition in a company situation such losses may be available against capital gains arising in the same accounting period. This will only be available providing that the trade has not ceased before the income and/or gains arise. The question then arises as to whether or not the receiver is actually trading the assets or is simply realising them.
Tax Registration and CGT Clearance Certificate
Section 980 of the Taxes Consolidation Act 1997 provides for a withholding tax equal to 15% of the VAT inclusive consideration, from the purchase price of certain assets by a purchaser where a tax clearance certificate is not produced and the purchase price of the property exceeds €500,000.
If the vendor obtains a tax clearance certificate (Form CG50A) then the vendor is entitled to full proceeds for the disposal. The clearance application must include the tax registration number of the receiver.
This is a key issue for receivers and has given rise to delays in practice.
The key issues for receivers in relation to VAT are:-
- Potential for a VAT claw back for the receiver.
- Lack of availability of VAT history of the property
- Resistance of purchaser to agree to accept a VAT charge
The Capital Goods Scheme (CGS) provides that a receiver or mortgagee in possession is liable for any claw back arising from an exempt use of the property.
Where a CGS claw back arises in respect of an interval during which the receiver was appointed, the VAT liability is to be apportioned between the owner and the receiver based on a formula and where a CGS increase is deductible VAT arises, and the additional VAT deductible is likewise apportioned.
There were recent changes in Finance (No 2) Act 2013 for receivers and banks where they are acting as Mortgagee in Possession (MIP).
The key change is that where the bank or receiver was appointed before 27 March 2013 the receiver/ MIP only becomes liable for any annual adjustment arising from a change in use under the CGS from 1 May 2014. Also, for those receivers/ MIP the debtor should have provided the receiver/ MIP with a Capital Goods Record by 18 February 2014, being 60 days from the passing of Finance (No 2) Act 2013.
The change does not affect the CGS liability arising on the VAT exempt sale of a property which, in Revenue’s view, was always and remains the responsibility of the Receiver/MIP.
Frank Murray is a Tax Director with Deloitte.