What is a VAT security bond and do I need to give one?

Understanding HMRC VAT security bonds during company insolvency

By issuing VAT security bonds, HM Revenue and Customs reduce their risk of revenue loss from non-payment. In certain instances, such as when an insolvent company is bought out of administration by the existing directors, a business may not be able to trade without providing such a bond.  

But other scenarios also result in this payment being necessary, typically when there have been issues with non-payment in the past. Security bond notices are sent to company directors at their home addresses, as well as to the company, and as a director you become personally liable for the payment of the sum.

What is a VAT security bond and when is one issued?

A VAT security bond is a pre-calculated sum of money that must be paid to HMRC by a company director or other officer. This bond, or cash deposit, can cover a number of taxes and duties, but when you receive a VAT security bond notice it means that HMRC believe you present a risk of non-payment of your VAT liability.

A notice that this payment is required could be received in various circumstances, including when:

• Your company has a poor payment history with HMRC, and has previously incurred penalties
• You’ve bought a business via the pre pack administration process
• You’ve deliberately failed to meet your HMRC liabilities, and haven’t been cooperative
• HMRC believes your company is insolvent

There may be grounds for appeal if you feel the notice is unjustified, and wish to challenge HMRC’s decision.

Security bond notice of requirement (NOR)

HMRC may write to you initially to warn you of the situation regarding your VAT liability. A VAT security bond notice of requirement, or NOR, is the official notification, however, and details their full requirements.

The NOR should include the following details:

• How much you need to pay
• The payment deadline
• How long the bond will be held by HMRC
• Methods of paying the security bond

A covering letter should also detail:

• Why you’re being asked to pay the security bond
• How the sum was calculated
• Whether joint or several security is required, plus the details of any other people receiving notices
• What happens if you don’t pay
• The appeals procedure should you wish to challenge HMRC’s decision

You must be given a minimum of 30 days from the date of notification to pay the bond. HMRC take a variety of factors into account when calculating how much security you need to provide, including your perceived level of risk.

What can you do if you receive a VAT Notice of Requirement?

You have a number of options in this situation, including:

• Paying the amount in full
• Negotiating for time to pay
• Ceasing trade
• Disputing the notice

What are the implications for businesses in receipt of a NOR?

When an insolvent company receives a notice of requirement it can compromise efforts to restructure and save the business from liquidation, but even for profitable companies, paying a VAT security bond is likely to severely deplete cash levels and could cause serious long-term problems.

New companies set up following pre-pack administration won’t be able to trade until the bond is paid. Directors and other officers of the company may be held personally liable for the payment, potentially causing bankruptcy in some instances.

Non-payment of a VAT security bond is a criminal offence, and HMRC are highly likely to take you to court as a result. The financial penalties are significant – as much as £5,000 for every transaction that is allowed to go through the business after the payment deadline has passed.

Appealing against a notice of requirement

You can lodge an appeal within 30 days of receiving a notice. Essentially, the appeal will challenge whether HMRC has been ‘reasonable’ in demanding this security, and it’s advisable to seek professional assistance in this respect.

Licensed insolvency practitioners understand the system, and will advise on whether an appeal is viable. If so, they’ll also help you present a clear, well-defined case backed up by solid documentary evidence.

If you have received a VAT security bond notice of requirement, or would like more information on the ramifications, call one of our expert team at Begbies Traynor. We operate from over 70 offices around the UK, and will be able to arrange a same-day consultation to discuss your situation.