Introduction

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 usually 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 for the taxpayer and/or the lender.

Practical difficulties have existed for some time whereby for example a 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 borrower’s marginal rate of tax without being in a position to claim the tax deductions which would be available had the borrower been assessed. In addition claw back provisions in respect of tax incentivised assets, such as section 23 properties, may impact on the lender.

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.

Latest Developments

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 of receiverships.

A number of submissions were made by interested parties including the Consultative Committee of Accountancy Bodies in Ireland or “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 guidelines on tax consequences of receivership and mortgagee in possession have been formalised and are expected.

Some Practical 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.

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. 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.

This is a matter of fact based on the circumstances of each case. Revenue have recently updated their operating manual with commentary as to whether, and if so, when a trade may cease altogether.

Typically where property was bought to sell, the property may be rented temporarily when the market is stagnant and while there is no visible trading activity. If a receiver is appointed it could be argued that he is stepping into the shoes of the trader as he takes control of the property. This could be important because if a subsequent sale of the property by the receiver of a company is treated as a trading transaction, the responsibility for any tax on a profit on the sale is the company’s. This could potentially leave the company, which has the responsibility for payment of the tax, without any cash or assets with which to pay the tax liability on the sale. This would not be the case if the property was disposed of as a capital asset giving rise to a chargeable gain in which case the receiver would be obliged to account for on the sale from the proceeds. This apparent anomaly has not been addressed in legislation or in Revenue guidelines.

It is interesting to note that if there is a disposal of land in the course of a winding up, there is a specific tax provision which treats such disposal as being in the course of a trade, as if the company had not ceased to trade.

Tax Registration and CGT Clearance Certificate

Section 980 TCA 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. In addition it may be the case that the bank, as mortgagee in possession rather than the receiver would be required to complete the sale in which case the Revenue could insist that the bank rather than the receiver is named as vendor on the CGT clearance certificate, which in practice could delay the process.

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. The lender may be responsible for this tax in respect of the property on the basis that it is treated as rental income. This is delaying a disposal strategy in certain cases.

Receiver liable to tax on disposal of assets – Capital losses restricted

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.

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 a receiver is appointed over assets which will generate capital losses and capital gains on sale, it would be expected that they could be offset against each other. However, that may well not be the case. For example, assets which qualify for capital allowances, such as hotels, could have losses restricted entirely. However, where capital allowances due to insufficiency of income have not been claimed and will never be claimed, Revenue may accept that the expenditure is not restricted in calculating the capital loss on sale. A capital loss may also be restricted to the extent that any borrowings in respect of the asset being disposed of, have, or may be, released or written off.

VAT

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 refund under the CGS arises, in respect of an interval during which the receiver was appointed the additional VAT deductible is likewise apportioned.

Where the bank or receiver was appointed before 27 March 2013 the receiver/MIP only becomes liable for any annual adjustment arising 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 the Finance (No 2) Act 2013. For Receivers/MIP’s appointed after 27 March 2013, the receiver/MIP becomes liable for any capital good scheme adjustments that are required from the date they are appointed. The above 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.

The recent guidance from Revenue regarding transfer of business relief is resulting in a lot more property transactions being subject to the transfer of a business relief provisions. While under the transfer of business relief there is deemed to be no supply for VAT purposes it can create an issue under the CGS where the receiver/MIP is required to pass the CGS record to the purchaser but typically does not have sufficient information from the borrower to allow them to do so. This creates a level of uncertainty around the sale of the property.

Frank Murray is a Tax Director with Deloitte Dublin.

Email: fmurray@deloitte.ie
Website: www.deloitte.com