My daughter got involved with MLM two years ago and ended up with an IVA because of it. Over the course of a year, she invested 10K in the "business" and went into the IVA with a total of 30K in debt.
She is also employed full time and a UK tax payer. She's made a claim with her tax office to offset the 10K business loss against her normal salary, and secured a sizeable tax refund because of it.
Problem is she hasn't told them about the IVA. The dept she's claimed a tax refund for is written off by the IVA. Can she do this, or is it fraudulent?
If she has not been open with the IR then she will probably be penalised. A bit more detail is needed to say any more. Given the IR powers and their willingness to use them she is very foolish if she has tired to deceive them.
Bankruptcy and IVAs and other statutory discharges of debt extinguish the debt (there are arguments about that, but for practical purposes it's true) if and only if the proper law of the debt is the same as the law of the discharge. So if you file bankruptcy (Ch. 7, 11 or 13) in the USA, as dozens of British and Canadian and American investors in Lloyd's of London did, their English debts are not extinguished. Rather, the remedy (Lloyd's ability to sue) in the US is extinguished. And, thanks to some case law, Lloyd's could be sanctioned for trying to collect (contempt of the discharge) even if they did so outside the USA.
But the principle is correct: a discharge eliminates the debt only if it is a discharge of the country of the debt. Otherwise it is effective only if the creditor appeared in the bankruptcy (filed a proof of debt, or contested the discharge, etc.)
Thus: an English or a Canadian Lloyd's Name who filed for bankruptcy in the USA could still claim his/her Lloyd's losses for tax purposes in the UK or Canada because the US discharge didn't extinguish the debt -- even though Lloyd's, because it does business in the USA, would not dare to try to collect on that debt.
Now, the Inland Revenue should know about the IVA. While Inland Revenue will not appear (and claim) in any foreign bankruptcy (for fear of being involved in foreign litigation) it will claim in an English bankruptcy. So why are they seemingly unaware of it, and now offering a refund? In principle, the tax consequences of the UK losses should have been resolved in the insolvency proceeding.
This is very specialised stuff. All I can do in this case is to give you some additional information. Unlike US tax law, UK tax law does not specifically address the disposition of tax attributes and the non-taxability of debts discharged in bankruptcy (in general, forgiven debts are taxed as income in many or most countries, except when they are in the nature of gifts out of love and affection).
Most likely, though, your daughter is skating on thin ice in claiming for a nonexistent loss. I will let others deal with that however. (The trick is usually to claim the tax refund before filing for bankruptcy, or IVA, or composition, or any similar arrangement. But I can't speak to English procedure since I never appear in court.)
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