The Tax Implications of Appointing a Receiver - Response to the Department of Finance and Office of the Revenue Commissioners Consultation Paper dated July 2012

1. About CCAB-I

The Consultative Committee of Accountancy Bodies – Ireland is the representative committee for the main accountancy bodies in Ireland. It comprises Chartered Accountants Ireland, the Association of Chartered Certified Accountants, the Institute of Certified Public Accountants in Ireland, and the Chartered Institute of Management Accountants.

Brian Keegan, Director of Taxation at Chartered Accountants Ireland (brian.keegan@charteredaccountants.ie, 01-6377347) may be contacted if any further details in relation to any points made in this submission are required.

2. Consultation Considerations – Summary

Reform of the tax legislation along with guidance from Revenue has long been called for by our members to address the difficulties being experienced by lenders, receivers, borrowers and tax agents when dealing with the tax treatment of receivership cases. We therefore welcome the steps towards reform taken by Revenue and the Department of Finance, beginning with the launch of this consultation.

The meeting between CCAB-I representatives and officials from both the Department of Finance and the office of the Revenue Commissioners as part of the consultation process has, in our view, added clarity to current practical and legislative issues with the taxation of receivership cases and has to a degree shaped the content of this submission.

CCAB-I have significant concerns about the practical and legal implications of the proposals set out in the consultation paper and we do not support the implementation of any of these proposals as currently formulated. However, in this submission we propose an alternative which we consider will principally address the current fundamental issues with the taxation of receivership cases and remove the disincentive to transact in the market. We also outline what are the key experiences of our members and the issues encountered in dealing with receiverships cases.

In summary:

1. In our view the practical difficulties for a receiver or lender to obtain all relevant tax information about the borrower's tax affairs is the key challenge to be addressed under this consultation. However, such information deficit should not be a used as a reason on its own for introducing significantly new legislation or concepts.
2. The borrower's right to tax reliefs, credits, capital allowances etc. must be preserved. It will be inequitable to deny the use of tax entitlements merely for the sake of simplifying administration.
3. The tax liability from receiver transactions cannot be greater than that which would have otherwise been due.
4. The overriding VAT principal must be that the VAT liability is determined by the activity.
5. The issues arising in the cases of multiple receiverships and insolvent partnerships must also be considered.
6. Any proposed legislation in the context of receivers should have regard to the Personal Insolvency Legislation.
7. By their very nature, receivership cases do not generally incur substantial taxable profits or gains. For this reason we consider that the cost to the Exchequer of any proposals implemented under this consultation will be negligible.

We hope to continue to engage with your Department and Revenue on the tax implications of receiverships and welcome the opportunity to consult on any draft legislation prepared under this consultation.

3. Introduction

The increase in volume of receivership cases in recent years has amplified the uncertainty and inconsistencies in the tax treatment for lenders, receivers and borrowers. In our view these difficulties arise because the tax legislation has not evolved in line with self-assessment and VAT legislation and existing legislation is inadequate to deal with the receiverships and their associated complexities.

Receivers, lenders, borrowers and tax agents are working in an uncertain environment with potential significant exposures to tax liabilities and sanctions. The uncertainty and inequitable tax treatment is, in our experience, preventing property transactions in the market which in turn is negatively impacting our economy.

Under existing legislation, receivers or lenders must obtain specific information about the tax position of the borrower in order to satisfy the tax obligations arising from the receivership. This presents a huge practical challenge and is adding to the already unsatisfactory position.

4. Response to request for general comments on the proposals set out in the consultation paper

1. In practice receivers are faced with the challenge of obtaining details of borrower's tax history and personal information. This challenge is further exacerbated by the very nature of receivership cases whereby any available tax records will often be unreliable and of poor quality or even non-existent. Further practical difficulties also arise where the receivership period straddles a company's accounting period and in such cases, the receiver will be missing information for earlier months in the accounting period.

It must also be recognised that in many cases there will be considerable resistance to the appointment of a receiver. There will not always be goodwill shown towards the work of the receiver, which may hamper his or her attempts to secure information in connection with the assets in question. Even in situations where the atmosphere remains relatively positive, the circumstances leading up to the appointment of a receiver in the first place will have caused administrative disruption. Key advisers may not have been retained; key employees may have left, resulting in a loss of organisational knowledge.

Issues can also arise in the case where a receiver is appointed over several properties with different ownership structures. There may be a number of borrowers with the same name and the receiver will not be in a position to identify each borrower and consequently their tax history. Personal information on each borrower including details of their PPSN is required to enable the receiver to identify the tax obligations.

We recognise that one possible solution to the information problem would be for Revenue to take on a more co-ordinating role and provide the necessary information to enable the tax liabilities to be identified. However, we consider that such a solution may not fully address the problem unless Revenue is provided with more detailed information from the borrowers outside of the self-assessment basis. If it is Revenue's position that the existing information disclosure powers afforded to them under the provisions of Section 851A are inadequate, additional statutory provisions will be required to afford Revenue the necessary information sharing powers.

But the consequences of introducing such additional powers may be disproportionate to the benefits they might realise. There is a long established and valuable tradition of confidentiality between Revenue and the taxpayer, with exceptions only permitted in limited circumstances, including (as a punitive measure) publishing the names of tax defaulters. There would have to be compelling evidence of significant Exchequer loss before contemplation of any adjustment to the rules governing taxpayer confidentiality. The provision by Revenue of taxpayer information directly or indirectly to lenders could well affect other circumstances outside of the receivership.

2. We do not support the proposal that the borrowers equitable entitlement to tax losses, capital allowances and associated reliefs be denied for the sake of simplifying the tax administration of receivership cases. Any proposed legislation under this consultation must preserve the borrower's tax attributes. It must also be recognised that just as asset values have plummeted giving rise to these consultation issues, certain asset values can and will recover. Shortcuts taken through disregarding tax histories in the interests of short-term settlements could in certain cases, where asset values recover, result in loss of revenue to the Exchequer.
3. There are risks associated with increasing Revenue priority over pre-existing creditors, and also with enabling the collection of taxes from any party to a receivership transaction. While we accept Revenue's entitlement both to collect the tax that is due and to collect from the correct party, Revenue will not wish to collect more tax than is correctly due. In no case should any party in a receivership be liable to a greater tax liability than would have otherwise been due.

Equally, it is not equitable to require any party to meet a liability greater than the cash resources available to them arising from transactions on the assets in question. There is little or no merit in a policy whereby 100% (or possibly more) of the proceeds are payable to Revenue due to a clawback of VAT, or a property based tax relief.

There is merit in an approach which identifies that any tax liability be due in the first instance from the party who crystallises the liability and consequently has the cash resources to satisfy this liability. Any legislative extension to this principle must be accompanied by safeguards for the paying party, including a straightforward and rapid right to direct refund where it is established that an overpayment of tax has been made.

4. Certainty as to which party is liable to account for the tax on disposal is required. If it is to be the receiver, then the legislation must give that priority and absolve the lender and the borrower of the liability arising on disposal. We cannot have a position whereby the lender or borrower is left with any secondary liability.
5. The overriding requirement of any proposal is that the VAT liability must remain driven by the activity as VAT is an activity based tax. The VAT position of the borrower should not be altered in any way by the appointment of a receiver.
6. The consultation appears to focus on property receiverships only. In our experience retail receiverships will be more prevalent in coming years and any proposals implemented should equally apply to all receivership cases.
7. There is related uncertainty emerging in bankruptcy cases, particularly in cross-border situations. The existing legislation, as is the case for receiverships, is inadequate to deal with bankruptcies.
8. We note that the proposed Personal Insolvency Legislation, as published in June of this year, could result in additional requirements for tax information. We believe that any proposed legislation in the context of receiverships should also have regard to these requirements under the Personal Insolvency Legislation.
9. Finally, in our view we consider that the cost to the Exchequer of any proposals introduced as a consequence of this consultation will be negligible. By definition, in receivership situations, taxable surpluses are unlikely to arise. Any measures taken towards simplification or clarification are in fact likely to be Exchequer positive. We would expect that any proposals implemented by way of new legislation would not apply retrospectively.

5. CCAB-I Suggested Alternative Proposal

Reform of the tax legislation along with clear guidance is now vital to address the ambiguities and challenges being experienced by lenders, receivers, borrowers and tax agents when dealing with the tax treatment of receivership cases. We acknowledge the steps taken by Revenue and Department of Finance towards reform beginning with this public consultation; however, we are the view that the proposals as set out in the consultation paper will not achieve the necessary certainty and clarity needed to improve the business environment and stimulate transactions in the market. Any proposal implemented under this consultation must confirm the tax treatment of all parties involved in the receivership while also providing clarity on the non-tax related matters.

One possible alternative is a timed optional application of features of Proposal 2 in the consultation document. We consider that the receiver should be given the option of applying for the tax treatment under this proposal and where the option is not applied, the status quo would prevail. We understand that the scope of this consultation is limited to property receivers. While we would like to see the consultation extended to deal with all receivership cases and particularly bankruptcy cases, our proposal is limited to the scope of this consultation and therefore applies to receivership cases only.

The purpose of the suggestion is to help clear a logjam of cases in the context of a current dysfunctional property market. Over time, the market will undoubtedly improve, and therefore the suggestion is time bound. The thinking behind it is linked to the thinking behind the current legislation which allows for the disposal of certain properties without exposure to Capital Gains Tax where certain conditions are met.

The key features of the suggestion are:

• The receiver would be liable for tax in relation to income and gains arising during the receivership as appropriate.
• The receiver would be accountable for paying the tax liability and filing the relevant returns.
• When computing the income/gain no regard would be had for the borrower's losses forward, personal allowances or reliefs etc.
• Any capital loss realised by the receiver on a disposal of an asset would be preserved and made available to the borrower.
• Any capital allowance balancing event or S23/50 clawback would be disregarded (by both the borrower and the receiver).
• The purchaser of the property would not be entitled to any capital allowances etc. on the property.
• The borrower's tax history is retained as even if the receiver is not in a position to avail of losses forward, allowances etc. they will be maintained for non-receivership income/ gains.

The receiver may elect for the above treatment in the case where sufficient information is not available to determine the availability of losses forward, reliefs and allowances. The receiver will be in a position to compute the tax liability with greater certainty and have comfort as to their responsibilities for meeting this liability.

In the case where the value of the borrower's trading stock has appreciated during the receivership period while the stock value may have been impaired in the trading accounts resulting in a loss forward the application of proposal 2 as outlined in the consultation document would result in a higher tax liability than would have been the case if no receiver was appointed. The optionality attaching to our proposal addresses this issue as the receiver need not elect for this treatment. Also, in cases where the receiver has the necessary information to compute the liability it is likely that this option will not be elected for and the status quo will apply.

To address the current issues without affecting the longer term tax environment, we consider that this optional proposal should be restricted to apply for two tax years from 1 January 2013 to 31 December 2014.

When considering any suggested proposal it must be recognised that CCAB-I are not in a position to design new tax laws to address the current difficulties with the tax treatment of receivers which will at the same time have equal application and relevance in times of a buoyant market. Our proposal reflects the need to provide certainty now as to the tax treatment of receivership cases and to achieve a stimulus for transactions in the marketplace.

However, we do recognise that from a public policy perspective, there could be concerns arising from this proposal. These might include:

• Borrowers intentionally defaulting on a loan in the expectation that a receiver will be appointed to effect a sale without a capital allowance claw-back for the borrower.
• The denial of capital allowance tax relief to a purchaser impacts the market value of a property.

It may be possible to implement safeguards to address the above issues.

Source: Chartered Accountants Ireland. www.charteredaccountants.ie.