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VAT Relief on Bad Debts Revisited

By Gabelle

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Bad debts are a significant and permanent feature of the economy. The only silver lining for taxpayers is that the VAT charged on sales can be recovered under the bad debt relief provisions (Section 36, VAT Act 1994). This is a valuable relief, but there are some unexpected complications.

Consider a supplier that charged VAT in its invoice to its customer, who in turn paid a portion of the invoice but could not pay the full amount. Could such a supplier set the part-payment against the “net” part of the invoice, leaving the unpaid “VAT” part of the invoice claimable in full under the bad debt relief provisions?

On 20 January 2012 we reported an Upper Tribunal case on this issue, Simpson and Marwick v Revenue and Customs Commissioners ([2011] UKUT 497 (TCC)):

The supplier’s bad debt had been paid by an insurance company. However, the insurance company only paid the net amount of the debt, leaving the VAT amount (a separate “VAT only” invoice) unpaid. The idea was that the business customer would pay the balance to the supplier having claimed the input VAT from HMRC. In this case, the customer did not pay the balance, so the supplier claimed bad debt relief for the full VAT amount.

The Upper Tribunal decided that the VAT element could be recovered in full by the supplier under the bad debt relief provisions. HMRC then appealed to the Inner House of the Scottish Court of Sessions: Simpson and Marwick v Revenue and Customs Commissioners ([2013] CSIH 29, published on 22 April 2013).

The Court of Sessions reversed the Upper Tribunal’s decision, stating that:
“…merely identifying the unpaid amount as being a sum constituting the element of VAT in the consideration for the supply in question could not justify bad debt relief being given for the entirety of that element; to do so would allow the supplier and customer to agree to attribute the latter’s partial payment to the element of the consideration not representing VAT; and would be inconsistent with the statutory provisions.”

Counsel for the taxpayer agreed all these points in court, so an appeal against this decision seems unlikely.

Partially paid invoices will therefore result only in partial relief for VAT on bad debts

Published May 2013