Accounting for an IVA

I have a client who has entered into an IVA as at 30/10/10. His creditors at that date stand at £40,000. Within the IVA they have agreed to accept 10p-25p in the pound. He is to pay this amount on a monthly basis over 60 months. He is to however carry on trading and he will have minimal or no credit terms with suppliers. My main query relates to the creditors. As we know that they are going to get the full debts, at what stage do we write off what is not going to be paid? Now? Evenly over the IVA, or at the end? If we write the non payable portion off now we would in fact have a negative cost of sales! Also within VAT regulations, if something is not paid after 6 months then the VAT claimed becomes repayable, is this still the case with an IVA? When we write the balance of the creditors off, some of it is VAT, does this then become payable as well?

  • The problem with an IVA is that it is a five year arrangement and it can fail. It's possible that the debtor makes two years contributions and then it fails and he ends up bankrupt, if he still has assets. I assume if the IVA has been agreed that the dividend offered is greater than would be available in bankruptcy.

    The creditors have no possibility of recovering more than the dividend offered (between 10p and 25p) they therefore have no possibility of getting more than 25p, so the 75p bad debt should be written off immediately. The remaining 25p can be reassessed every year when the annual report is produced which should tell you whether the dividend is on line.

    From the debtor's position, he remains liable in full until the end of the VA and it has been fully implemented.

  • If the 75p is writen off imediately, then it would make a large profit in his accoutns and would then make HMRC a more preferential creditor for SA wouldn't it? speaking to ICAEW help desk they say leave it on there as if the IVA fails then the full amount reverts to become payable.. is this correct?

    With regard to the VAT, if the purchase ledger is adjusted now, I take it the VAT becomes repayable?

    Without being rude, what experiance do you have with IVA's and accountign for them? (sorry need to ensure i do get the correct treatment!)

  • I had a similar situation, and after some research identified that under legislation any debt written off under a properly approved voluntary arrangement is not subject to tax.  I also spoke to a technical officer at HMRC and they agreed that this would be the case, i.e. it would not be taxable.  Thus this would not impact on the level of tax due.

    My concern had been that the accounts should be based on 'best estimate of what is likely to happen', and as mentioned, this is not black and white  - write it all off now / partly / asses each year etc etc.  Following this, if the creditors were written off at the end of the arrangement then as you say, would this indicate that a higher tax liability would be suffered in year 4 / 5 ?.  The guidance I obtained would suggest that when written off through a formal IVA (i.e. as opposed to an informal settlement / negotiation) then the write off is not subject to tax.  I am not however a technical personal tax expert, and as such would suggest getting clarification yourself from HMRC on this matter.

    It may be worth also checking whether HMRC have incorporated their usual terms to include the final SA tax liability for the tax year after the implementation of the VA within their claim in the VA.

    Regarding VAT - ESC 3.20 did apply when an individual entered an insolvency procedure (of which an IVA was one).  This stated that the VAT input repayment on creditors under bad debt rules was not applicable i.e. that VAT did not have to be repaid on the creditor write off. However, this ESC does refer to the old VAT legislation (i.e. when bad debt relief had to be notified and input VAT only repaid when notifed by someone they were claiming bad debt relief).  My understanding is that this ESC still applies in the current bad debt rules.

    Also, on an aside - have you considered if the VAT on the supervisors fees is reclaimable - is this already built into the IVA?