HMRC have made a change in the treatment of VAT bad debt relief claims made when the net tax due on a return has not been paid or has been partly paid.
The change follows the VAT tribunal decision in Times Right Marketing Limited (In Liquidation) LON/2006/1376.
The company had appealed against a decision by the Revenue to reject a claim for bad debt relief (BDR) on the grounds that it 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.
HMRC 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.
Revenue & Customs Brief 18/09 contains two examples providing further clarification.
Where bad debt relief has been claimed, 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 the next VAT return or, if necessary, by voluntary disclosure, subject to the normal time limits.
The change in HMRC’s policy only applies in circumstances relating to what constitutes paid for the purposes of claiming BDR.
It does not alter the other conditions that must be satisfied before claiming the relief. It should be understood that BDR can only be reclaimed to the extent that the output tax has actually been paid.
The Revenue has confirmed that it will not be repaying in cash output tax that has not been paid on the original supplies in the first place.
