19589

Value Added Tax – Bad Debt Relief – Whether VAT “accounted and paid” on the supply – s.36 VATA 1994 – Appeal dismissed

LONDON TRIBUNAL CENTRE

	PSI ENGINEERING LIMITED	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	DR K KHAN (Chairman)
						MISS D WILSON

Sitting in public in London on 4 April 2006

Mr W N Lewis, Engineering Consultant, for the Appellant 

Ms N Shaw, instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The disputed Decision of the Commissioners of Revenue and Customs (“HMRC”) is a Decision to amend the 04/01 VAT Return of the Appellant disallowing the entire sum of input tax (£32,838.04) claimed on the Return resulting in £10,500 (output tax declared) becoming tax due for payment.  The Decision of HMRC was communicated to the Appellant on 2nd August 2001.

The Facts

1.	The Appellant submitted the 04/01 VAT Return on 16 July 2001, with 	output tax of £10,500 declared and input tax of £32,838 reclaimed, the effect 	of which was a refund claimed of £22,344.04.  The entire input tax claim 	relates to VAT on bad debts (ie recovery of output tax) which the Appellant 	believed had previously been accounted for. In fact, the Appellant had 	accounted for none of the output tax.

2.	By letter of 2nd August 2001 the Respondents made a decision to disallow the 	entire sum of the input tax claimed on the Return, thus resulting in £10,500 	output tax becoming due for payment.

3.	The £32,838.04 included £19,906.25 purportedly accounted for by the 	Appellant on their first VAT Return period 01/99.

4.	The £19,906.25 relating to output tax was the subject of prepayment 	verification by HMRC and the entire sum was reduced to nil.  The Appellant 	contested this disallowance of input tax on the 01/99 Return (in the case 	reference LON/00/443) but did not dispute the reduction of output tax from 	£19,906.25 to Nil. The Return of 01/99 has shown a Nil output tax since the 	adjustments made by HMRC.

The Legislative Provision

5.	Section 36 VATA  1994 states as follows:

(1)	Subsection (2) below applies where– 

(a)	a person has supplied goods or services for a 	consideration in money and has accounted for and 	paid VAT on the supply, 

(b)	the whole or any part of the consideration of the supply 	has been written off in his accounts as a bad debt, and

(c)	a period of 6 months (beginning with the date of the 	supply) has elapsed.

(2)	Subject to the following provisions of this section and to regulations 	under it the person shall be entitled, on making a claim to the 	Commissioners, to a refund of the amount of VAT chargeable by 	reference to the outstanding amount.

(3)	In subsection (2) above “the outstanding amount” means– 

(a)	if at the time of the claim no part of the consideration 	written off in the claimant’s accounts as a bad debt has 	been received, an amount equal to the amount of the 	consideration so written off;

(b)	if at that time any part of the consideration so written 	off has 	been received, an amount by which that part is 	exceeded by the amount of the consideration 	written off;

and in this subsection “received” means received either by the claimant or by a person to whom has been assigned a right to receive the whole or any part of the consideration written off … .

(5)	Regulations under this section may-

(a)	require a claim to be made at such time and in such 	form and manner as may be specified by or under the 	regulations;

(b)	require a claim to be evidenced and quantified by 	reference by reference to such records and other 	documents as may be so specified;

(c)	require the claimant to keep, for such period and in such 	form 	and manner as may be specified, those records 	and documents and a record of such information 	relating to the claim and to anything subsequently 	received by way of consideration as may be so 	specified;

(d)	require the repayment of a refund allowed under this 	section where 	any requirement of the regulations is not 	complied with;

(e)	require the repayment of the whole or, as the case may 	be, an 	appropriate part of a refund allowed under this 	section … ..

(ea)      … .

(f)	include such supplementary, incidental, consequential 	or transitional provisions as appear to the 	Commissioners to be 	necessary or expedient for the 	purposes of this section;

(g)	make different provision for different circumstances.

Appellant’s Arguments
6.	The Appellant’s written submissions were contained in five pages submitted 	on April 5th 2006.  Those submissions, where relevant, are outlined below:

6.1	That the output tax in the VAT Return 01/99 had been paid by way of credit.  	The VAT Return 01/99 submitted by the Appellant in March 1999 showed 	£19,906 declared as output tax on net sales of £113,750 with £27,141.80 	declared as input tax on net sales of £155,096 with a credit of £7,235.80 due 	from HMRC to the Appellant.  The Appellant argued that since a credit was 	due to them it is not correct for HMRC to say that the sum of £19,906 had not 	been paid.

6.2	The HMRC unsigned and undated 01/99 VAT Return with nil entries is 	incorrect  and has no immediate bearing on the Appeal.

6.3	The Appellant requests that an assessment be raised for output tax in the sum 	of £19,906.

6.4	The Appellant has had various complaints, not relating to the Hearing, but in 	matters relating to HMRC’s dealings.
7.	The Respondents Arguments

7.1	HMRC say that the issues in this Appeal were determined on 5th August 2003.  	A credit assessment was issued on 11 August 2003 for 12,931.79 and a further 	amount of £10,500 was also credited in the same assessment to create a total 	credit of £23,432.  The 19,906.25, the subject of pre-payment verification, was 	reduced to nil and consequently no bad debt relief is appropriate.  There is a 	requirement under s.36(1)(a) VATA 1994 for output tax to have been 	accounted for and paid before bad debt relief can be claimed and such output 	tax has not been accounted for in this case.  The bad debt relief of £32,838.04 	will only be allowed if additional output tax of £19,906 was paid in respect of 	the period 01/99.

8.	The Tribunal’s reasons and conclusions are given below.

8.1	The Appellant appeals by Notice of Appeal dated 25th October 2001 against 	the decision of HMRC to amend the Appellant’s VAT Return for the period 	04/01.  The Return dated 16th July 2001 had declared output tax of £10,500 	and reclaimed input tax of £32,844.  (Later amended to £32,838).  The latter 	figure was claimed as bad debt relief.

8.2	The Return was referred to R. N. Thomas, Cardiff VAT Office, for pre 	payment verification. As a result of these enquiries, the Officer established 	that input tax claimed of £32,838 related to VAT on bad debts.

8.3	By letter of 2nd August 2001, HMRC informed the Appellant that the entire 	amount of input tax claimed on the Return was to be disallowed and not 	eligible for bad debt relief.  The figure claimed was therefore reduced to nil.  	HMRC’s letter of 5th August 2003 summarises the position as follows:

“I can also now advise of the outcome of my reconsideration of the input tax in period 04/01, which as you are aware is the subject of appeal reference LON/01/1133 with the VAT & Duties Tribunal.  The amount claimed on the return was £32,844.04 and you have accepted that this sum was overstated by £6.00.  The remainder is bad debt relief as follows:

	Period 01/99	£19,906.25

	Period 04/99	£1,741.25

	Period 04/00	£11,190.54

You will recall that the Commissioners reduced both the output tax and input tax to nil on the 01/99 return, the latter being unsuccessfully appealed to the Tribunal under reference LON/00/0433.  Consequently the output tax has never been re-instated as a result of that Tribunal, thus a net credit of £12,931.79 (rounded to £12,932 for assessment purposes) is appropriate given that I am accepting that output tax is the same in net terms as allowing £32,838.04 but re-instating the 01/99 output tax, since clearly a duplication of credit would ensue if the output tax in 01/99 was allowed to remain as nil yet credit via bad debt relief was given in period 04/01 for £19,906.25.”

	The letter though at times not clearly worded explains that the input tax in the 	01/99 return was reduced to nil.

8.4	The core point to be decided relates to the bad debt claim for £19,l06 and 	whether, as the Appellant contends, this should be collected as output tax by 	way of assessment.

8.5	Section 36 VATA 1994 provides relief for bad debts. The relief is available to 	a taxable person to claim a refund for VAT if, inter alia, they write off a bad 	debt in their accounts (all or part of the consideration for a supply) and 	accounted for and paid tax on the supply. The relevant section, Section 	36(1)(a) VATA 1994, states that output tax on a supply must be “accounted  	for and paid” before bad debt relief can be claimed.  In real terms, the entire 	claim 	for bad debt relief of £32,838 could only be allowed if additional 	output tax of £19,906 was paid in respect of the period 01/99.  A claim for bad 	debt relief i.e. where no payment is made by the customer, is the amount of 	VAT which has been accounted for and paid by the supplier of the goods or 	services.  

8.6	Whilst the Appellant contested the disallowance of input tax on the Return for 	the period 01/99, they did not dispute the reduction of the output tax from 	£19,906 to nil.  The nil output tax for that period has remained since the pre-	payment adjustment was made and this was explained to the Appellant by 	letter dated 5th August 2003 and accepted by the Appellant.  It should be borne 	in mind that the VAT invoice is only evidence of a claim for credit and the	claim can fail if there are inefficiencies in the documentation. HMRC can 	review and amend claims under their powers of verification and in this case 	has seen it as appropriate to amend the bad debt relief claim. 

8.7	In the circumstances, it seems to be clear that given no output tax has been 	paid to HMRC and there can be no credit for bad debt. An entitlement to the 	relief has not been established by the Appellant. The relief is only available if, 	assuming no payment is received in respect of the supply, the amount of VAT 	on the supply has been accounted for and paid to HMRC. In this case, that	amount has not been paid to HMRC and so the claim must fail.

8.8	There can be no assessment raised for output tax in the amount of £19,906 for 	the period 01/99. This submission seems to have arisen from a 	misunderstanding of correspondence between the Appellant and HMRC 	dated 2nd February 2006.

8.9	It is recognised that the Appellant has some complaint about the way certain 	other matters involving HMRC were handled.  The Appellant was advised of 	the complaints procedure. The Appellant had no complaints about the 	Tribunal’s  hearing.

For the reasons given below, the Appeal is accordingly dismissed.

Any issues relating to costs can be raised by way of Application.

DR KAMEEL KHAN
CHAIRMAN

RELEASED: 24 May 2006

LON/01/1133