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HM Revenue and Customs Brief 18/09

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Issued 31 March 2009

VAT: Implications to the Bad Debt Relief conditions as a result of the Tribunal decision in Times Right Marketing Ltd

This brief announces a change in the treatment of VAT Bad Debt Relief claims made when the net VAT due on a return has not been paid or has been partly paid.

It follows the VAT Tribunal decision in Times Right Marketing Limited (TRML) (In Liquidation) LON/2006/1376.

Background

If you make supplies of goods or services to a customer and have not been paid you may be able to claim relief from VAT on your bad debts. In order to claim relief you will have to satisfy all the conditions set out in HM Revenue & Customs (HMRC) Notice 700/18, 'Relief for VAT on bad debts'. One of the conditions is that you must already have accounted for and paid VAT on the supplies you want to claim bad debt relief on.

TRML appealed against a decision by HMRC to reject a claim for Bad Debt Relief (BDR) on the grounds that they had not originally paid the output VAT due. The Tribunal found that the deduction of input tax from output tax due should be seen as in effect payment of that output tax.

Implications of the decision

We now accept that where a BDR claim is made, payment will be taken to have been made to the extent that output tax is covered by deductible input tax.

The following examples provide further clarification. Please note these examples do not necessarily cover all scenarios that could arise. The amount of BDR to be claimed is included in Box 4 of the supplier’s VAT Return, in the VAT period which covers the date they fulfill the conditions to make a claim, or a later period, subject to the usual time limits. For illustrative purposes this figure is shown separately here. It is assumed that all other BDR conditions have been satisfied.

£120,000 is taken to be the amount of VAT on bad debts over six months old at the time of the 2009-08 return.

Example 1 – Supplier has not paid net tax due in any period
  03/08 06/08 09/08
  £ £ £
Output tax 200,000 250,000 225,000
Input tax 110,000 112,000 111,000
BDR (in Box 4)     30,000 *
       
Net tax due 90,000 138,000 104,000
Tax paid Nil Nil Nil

*Allowable BDR in period 09/08 is £30,000 calculated as follows:

VAT related to bad debts on supplies made in period 03/08 - £120,000

Less unpaid net tax due in period 03/08 90,000

Maximum 03/08 bad debts available for relief six months later in period 09/08 30,000*

The amount of 03/08 BDR reclaimable in 09/08 has been restricted to the excess of input tax over output tax due on non-bad debt supplies, ie £110,000 input tax - £80,000 output tax.

Example 2 – Supplier has partly paid period 03/08 by the time of submitting their 09/08 return
  03/08 06/08 09/08
  £ £ £
Output tax 200,000 250,000 225,000
Input tax 110,000 112,000 111,000
BDR (in Box 4)     50,000 *
       
Net tax due 90,000 138,000 84,000
Tax paid Nil Nil Nil

*Allowable BDR claim in 09/08 is £50,000 calculated as follows:

VAT related to bad debts on supplies made in period 03/08 £120,000

Less unpaid net tax in period 03/08 70,000

Maximum 03/08 bad debts available for relief six months later in period 09/08 50,000*

The amount of 03/08 BDR reclaimable in 09/08 has been restricted to the excess of input tax over output tax due on non-bad debt supplies. £110,000 input tax - £60,000 (£80,000 - £20,000) output tax.

What happens if changes occur after I have made my claim, as above?

Where BDR has been claimed on the basis of the interpretation of payment made as set out above, it is possible that the figures for tax paid or input tax due may change after the date of the claim. For example, as a result of additional payment of tax, or alterations to that period’s input tax or output tax figures for the period by credit note or the correction of errors by voluntary disclosure or assessment.

In these circumstances the basis of the claim should be recalculated to see if the amount of BDR needs to be changed. If so, correction should be made on your next VAT Return, or if necessary by voluntary disclosure, subject to the normal time limits.

What does this change mean?

This change in our policy only applies in circumstances relating to what constitutes paid for the purposes of claiming BDR. It does not alter the other conditions you need to satisfy before claiming BDR. It should be understood that BDR can only be reclaimed to the extent that the output tax has actually been paid. This brief clarifies what paid means. We will not be repaying in cash output tax that has not been paid to us in the first place on the original supplies. Revisions to HMRC guidance and Notice 700/18, 'Relief for VAT on bad debts' will be made in due course.

Taxpayers or their advisers who consider making retrospective claims for repayment of underclaimed BDR as a result of this brief are advised that normal BDR time limits apply. Claims must be made within three years and six months of either the date on which the consideration that was written off as BDR was due and payable or the date of the supply.

For further information on the matters covered in this brief or on BDR generally you should contact HMRC on 0845 010 9000.


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© Crown Copyright 2009.

A licence is need to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.



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Article Published/Sorted/Amended on Scopulus 2009-03-31 14:45:41 in Tax Articles

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