No: C&E 8                            29 November 1994


                       BUDGET 1994 : VAT

            INSOLVENT TRADERS: SET-OFF OF VAT CREDITS
                      AND BAD DEBT RELIEF


The Chancellor proposes two further deregulatory changes to
the rules which limit the extent to which traders' pre-
insolvency debts can be deducted from VAT credits ("set-off") arising during
an insolvency administration. From Royal Assent:

       -   when companies trade under administration orders
       and   administrative receiverships, VAT credits arising
       after  recovery will not be set-off against debts remaining
       from the pre-insolvency period; and

        -   the rules preventing set-off during the period
        for which  a provisional liquidator is appointed in the winding-
        up of a company will also be applied during the period when
        an interim receiver is appointed in the bankruptcy of
        an  individual.

The Chancellor's intention is to assist companies in their
recovery   from insolvency and to respond to trade representations
about minor anomalies in existing legislation.

The Chancellor also proposes to make a minor amendment to
the legislation affecting relief from VAT on bad debts. The
Chancellor's intention is to clarify beyond doubt that relief is
available only on supplies made on or after 1 April 1989.

NOTES FOR EDITORS

1.     The Insolvency Act 1986 enables creditors to allow a
business to continue trading whilst trying to make the business
commercially viable. These arrangements are known as Voluntary
Arrangements, Administration Orders or Administrative Receiverships. Where
there is no prospect of rescue the creditors may take action to
have the business declared formally insolvent (bankruptcy or
liquidation).

2.     The legislation on VAT set-off was overhauled in the
1994 Finance Act. Whilst dealing with a few minor anomalies, the
Chancellor is also taking the opportunity to clarify
existing provisions by confirming that they only prevent set-off for
VAT      credits arising during the insolvency administration against
pre-insolvency debts.

3.     The cost to the Exchequer is estimated to be
negligible.

4.     The current bad debt relief scheme allows the
recovery of VAT charged on any supplies or services which remain unpaid
after a "waiting period". The purpose of the Budget amendment is
purely to clarify the existing provisions in the VAT Act 1994 by
confirming that from 1 September 1994, bad debt relief is available
only to    supplies made on or after 1 April 1989.

5.     A Compliance Cost Assessment (reference CCA 7) is
available, copies of which can be obtained from Jill Lewis, BACU3, 10th
floor W,   HM Customs & Excise, New King's Beam House, 22 Upper Ground,
London     SE1 9PJ (Tel No: 0171-865-5570).

6.      Details for traders are available in Budget notices
BN 75/94  and BN 27/94.



ISSUED BY:         HM CUSTOMS AND EXCISE,
                   PRESS AND INFORMATION OFFICE,
                   NEW KING'S BEAM HOUSE,
                   22 UPPER GROUND,
                   LONDON, SE1 9PJ

TELEPHONE:         0171 865 5468/5470/5471

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