20611

VALUE ADDED TAX – bad debt relief – returns rendered but all output tax not paid – claim for bad debt relief limited to the amount of tax paid (by way of credit for input tax) – whether relief available even though tax paid was not related to specific invoices – yes –appeal allowed – VATA 1994 s36; Value Added Tax Regulations 1995 SI 1995 No. 2518 regs 165 and 167

LONDON TRIBUNAL CENTRE

TIMES RIGHT MARKETING LIMITED
(IN LIQUIDATION)
Appellant

 - and -   	

THE COMMISSIONERS FOR HER MAJESTY’S 
REVENUE AND CUSTOMS 
Respondents

Tribunal: DR A N BRICE
 MRS E R ADAMS FCA ATII

Sitting in London on 11 February 2008 

Alun James, Counsel, instructed by Vantis Tax Limited for the Appellant 

Alexander Ruck Keene, Counsel, instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

The appeal
1.	Times Right Marketing Limited (the Appellant) is in liquidation. The liquidators appeal against a decision of the Commissioners for Her Majesty’s Revenue and Customs (Customs) dated 18 August 2006. The decision was to refuse a claim for bad debt relief for £179,743.98 for the accounting periods ending in June 2004, September 2004 and December 2004. 

The legislation
2.	Section 36 of the Value Added Tax Act 1994 (the 1994 Act) provides:

“36	Bad debts
(1)	Subsection (2) 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 for 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.  …

(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 to such records and other documents as may be so specified … .”

3.	The regulations made under the provisions of section 36 are in Part XIX (regulations 165 to 172) of the Value Added Tax Regulations 1995 SI 1995 No, 2518 (the Regulations). Regulation 165 is the interpretation regulation for Part XIX and defines “claim” and “relevant supply” as:  	

“165	In this Part-
“claim” means a claim in accordance with regulations 166 and 167 for a refund of VAT to which a person is entitled by virtue of section 36 of the Act and “claimant” shall be construed accordingly ….

“relevant supply” means any taxable supply upon which a claim is made.”

4.	Regulation 167 contains the provisions about the evidence required of a claimant in support of a claim and provides:

“167.	Save as the Commissioners may otherwise allow, the claimant, before he makes a claim shall hold in respect of each relevant supply -
(a) …a copy of any VAT invoice which was provided …
(b)	records or other documents showing that he has accounted for and paid the VAT thereon; and
(c)	records or other documents showing that the consideration has been written off in his accounts as a bad debt.”

The issue
5.	In 2004 the Appellant sent to its purchasers a large number of invoices which were not paid. The Appellant then ceased to trade. It later rendered returns to Customs showing the output tax due in respect of the unpaid invoices, and claims for input tax credit. It was, however, unable to pay the balance of the tax shown on the returns to Customs. It claimed a refund under section 36 up to the amount of the input tax credit claimed on the basis that it had, to that extent, accounted for and paid value added tax on the supplies. Customs refused the claim on the ground that the company had paid only part of the tax due and not the full amount of tax on each supply. The Appellant argued that it had paid the full amount of tax on some supplies and was not claiming a refund in respect of any tax which had not been paid. Alternatively, the Appellant argued that a refund should be made where only part of the tax chargeable on a supply had been paid but limited to the amount of tax which had been paid.   

6.	The issue for determination in the appeal was whether the Appellant was  entitled to a refund of the amount of bad debt relief claimed. As argued this raised two questions which were:

(1)	whether the Appellant was entitled to a refund even though the amount of tax claimed did not relate to specified unpaid invoices; and

(2)	alternatively, whether the Appellant was entitled to a refund where only part of the tax chargeable on a supply had been paid but limited to the amount of tax which had been paid.

The facts
7.	A bundle of documents was produced. There was no dispute about the facts. We therefore find the following facts.

The Appellant
8.	The Appellant was incorporated on 24 January 1997 and became registered for value added tax with effect from 1 April 1998. It provided marketing services. Initially the Appellant traded successfully employing 19 full-time staff and 3 or 4 free-lance workers. In July 2004 one of the Appellant’s major customers, Coldseal, advised the Appellant that it was going to re-structure its group and would pay all outstanding liabilities under a repayment schedule. The first three payments due in September 2004 were made but the subsequent payments were not made. Coldseal went into liquidation on 13 October 2004.

9.	On 29 November 2004 at an extraordinary general meeting it was resolved that the Appellant should be wound up voluntarily and joint liquidators were appointed. The directors were of the view that this was due to the failure of Coldseal. 

10.	During 2004 the Appellant had rendered a large number of invoices to a number of customers but most of the invoices were rendered to Coldseal. These invoices were not paid. The total amount of the unpaid invoices was £1,758,644.02 and the value added tax on the invoices amounted to £308,486.54. The smallest invoice was for £15.75 and the largest for £33,819.04. Most invoices were for about £2,000.  

January 2006 - The original claim for a refund
11.	On 3 January 2006 the liquidators wrote to Customs and claimed a refund in respect of bad debts. On 6 July 2006 part of the claim, relating to supplies made before 1 April 2004, was allowed and a refund was made. The rest of the claim was refused because the returns for the accounting periods ending in June 2004, September 2004 and December 2004 had not been rendered and paid as required by section 36(1).  

July 2006 – The first amended  claim with the returns
12.	The returns for these accounting periods were rendered and showed the following: 
			
		Accounting period ending in
			06/04		09/04		12/04		Totals for
									Three periods
Output tax 		£308,119	£261,382	£46,563		£616,064
Less
Input tax credit 	£242,014	£200,968	£40,311		£483,293
			------------	-----------	---------		------------
Tax due 		£  66,105	£  60,414	£  6,252		£132,771
				
13.	Although the returns were rendered the liquidators were unable to pay the tax due to Customs. The liquidators then amended their claim for bad debt relief for each accounting period as;

	Accounting period ending in		Amount of relief claimed 
06/04					£115,642
09/04					£177.492
12/04					£  20,600
				-----------
Total					£313,734

14.	The amount of relief claimed represented tax on all the invoices which had been rendered and not paid.  However, Customs pointed out that section 36(1) only applied where a trader had accounted for and paid the tax on the supply and, as no tax had been paid by the Appellant, the claim was refused..

October 2006- the second amended claim
15	On 23 October 2006 the liquidators re-amended their claim on the basis that tax had been paid up to the amount of the input tax credit claimed. First they deducted, from the amount of output tax due in each accounting period, that part of the output tax which had not been paid to them because of the bad debts. That yielded a figure for output tax due on the non-bad debts. They then assumed (against themselves) that the amount of tax which had been paid (by way of input tax credit claimed) related first to the non-bad debts. They then assumed that the balance of the tax paid (by way of input tax credit) related to the bad debts and restricted their claim to that amount. The calculations can be summarised as:

		Accounting period ending in
			06/04		09/04		12/04		Totals
									Three periods
Output tax 		£308,119	£261,382	£46,563		£616,064
Of which for bad debts	£115,642	£177,492	£20,600		£313,734
			-----------	-----------	---------		-----------	
for non bad debts	£192,477	£  83,890	£25,963		£302,330	
			-----------	-----------	----------	-----------

Tax paid by
input tax credit 		£242,014	£200,968	£40,311		£483,293
Attributed first to non		
bad debts of 		£192,477	£  83,890	£25,963		£302,330
			------------	-----------	---------		------------
Attributed to bad debts  	£  49,537*	£117,078	£14,348		£180,963

*For some unexplained reason this amount was later treated as £48,317.98 making the total amount claimed as £179,743.98

16.	The Appellants therefore claimed a refund of £179,743.98 on the basis that that amount of tax had been paid because there were valid claims for input tax credit up to that amount. 

17.	Customs then accepted that tax had been paid to the extent that input tax credit had been claimed, and so accepted that tax of £179,743.98 had been paid, but argued that because all the tax due had not been paid no bad debt relief was available.

The arguments 
18.	For the Appellant Mr James argued that all the requirements of section 36 had been fulfilled; tax had been accounted for and paid; the debts had been written off as bad debts; and a period of six months had elapsed from the dates of the supplies. It was not possible for the liquidators to pay all the tax due but the Appellant was not claiming a refund relating to any of the unpaid tax. It would be possible for the Appellant to identify individual supplies made by it which remained unpaid showing the amount of tax for which relief was claimed. If the refund were not made Customs would be unjustly enriched and there would be a distortion in the operation of the value added tax system because Customs would, in effect, be denying the Appellant credit for input tax paid by the Appellant to its suppliers. Customs had power to deny input tax to those to whom the Appellant had made supplies and who had not paid the Appellant. He relied upon Article 90 of the Council Directive of 28 November 2006 on the common system of value added tax (2006/112/EC) (the 2006 Directive) and distinguished Abbey National v The Commissioners for Her Majesty’s Revenue and Customs [2005] EWHC 1187 which concerned the rules of attribution in regulation 170 which concerned payments made at different stages. In this appeal there was no regulation containing rules attributing tax paid to individual bad debts. 

19.	Mr James argued, in the alternative, that if only part of the tax had been paid on a supply then bad debt relief should be available in respect of that part. Section 36 (1)(a) applied if any tax had been paid on the supply giving rise to the bad debt and that result was in accordance with the provisions of the Directive. He accepted that regulation 167 might be read otherwise but argued that the regulation could not extend the ambit of the section. 

20.	For Customs Mr Ruck Keene accepted that the phrase “accounted for and paid VAT” in section 36(1) included payment by way of a valid claim for input tax credit. However, he argued that, whenever there was a claim for bad debt relief in respect of more than one supply where not all the tax had been paid in respect of all the supplies, the taxable person was unable to demonstrate in respect of which supplies it had paid the tax. Even if the taxable person could identify some supplies in respect of which it claimed that all the tax had been paid there was no mechanism in the legislation for tax paid to be allocated to supplies in any particular order or according to any criteria. It followed that in such circumstances the taxable person would never be able to satisfy the requirements of section 36 and the regulations. Where a number of supplies were made in a single accounting period, and only part of the tax due was paid, it should not be open to the taxable person to choose to which supplies the tax paid should be allocated. Mr Ruck Keene accepted that, for accounting purposes, the Appellant had bad debts but his argument was that in this case the law gave no entitlement to bad debt relief.   

21.	Mr Ruck Keene went on to argue that, although it was accepted that the Appellant had paid tax up to the amount of the input tax credit claimed, Customs had received no monies from the Appellant. Although he accepted that Customs had power to deny input tax to those to whom the Appellant had made supplies for which it had not been paid, the fact was that Coldseal had gone into liquidation in October 2004. 

Reasons for Decision
22.	In considering the arguments of the parties we have found it convenient to begin with the provisions of the Directives in order to identify the relevant principles. We then consider the arguments of the parties about the meaning of our national legislation and the two questions arising out of the issue in the appeal.

The Sixth Directive
23.	At the date of the disputed decision the directive in force was the Sixth Directive (77/EEC/388). Title VIII of the Sixth Directive is headed “Taxable amount” and Article 11 is the only Article within that Title. Article 11A contains provisions which apply within the territory of a country and Article 11B deals with the importation of goods. Article 11C contains some miscellaneous provisions and Article 11 C 1 provides:

“1.	In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.

However, in the case of total or partial non-payment, Member States may derogate from this rule” 

24.	Mr Ruck Keene informed us that there had been no derogation by the United Kingdom from Article 11.C.1

25.	In considering the relevance of the taxable amount we recall that Article 2 of the First Directive (67/EEC/227) provides that the principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services. This is achieved by charging a rate of tax on the price or taxable amount and then deducting the appropriate input tax. 

26.	It is thus clearly the intention of Article 11 C.1 that, where invoices are not paid, the price (or taxable amount) on which tax is charged is reduced accordingly. Article 11.C.1 also applies where invoices are only partly paid and provides that in those cases the price (or taxable amount) on which tax is charged is reduced accordingly.

27.	It seems to us that the conditions to be determined by the member states, which are mentioned in Article 11.C.1, must be such as to ensure the correct application of that Article without making it excessively difficult, or impossible for taxable persons to claim the benefit of the provisions of the Article. 

The 2006 Directive
28.	The Sixth Directive was in force at the date of the disputed Decision but we have also referred to the 2006 Directive,  Title VII contains the provisions about taxable amount and Chapter 5 of Title VII contains some miscellaneous provisions. Article 90 is in Chapter 5. Article 90 is in the same terms as Article 11.C.1 of the Sixth Directive.  

The national legislation
29.	With the principles of the Directives in mind we turn to consider section 36. The scheme of section 36 is not to provide for the reduction of the taxable amount of the supply at the time of supply. It assumes that the full amount of tax was accounted for on the taxable amount of a supply in the accounting period in which the supply took place and provides for that tax to be refunded six months later when the debt is proved bad. Section 36 thus achieves the purpose of the Directives but that purpose remains that, where invoices are not paid, the price on which tax is charged is reduced; in other words, that tax is not due in respect of invoices that are not paid.

30.	We therefore interpret section 36 in the light of the purpose of the Directives and, in our view, the Appellant has complied with all its provisions. It made a number of supplies of goods and services, each for a consideration in money, and has accounted for and paid tax (by way of input tax credit) up to the amount in respect of which a claim was made. All of the consideration has been written off as a bad debt and the period of six months from the date of each supply has elapsed. The Appellant should therefore receive a refund of the amount of tax it has paid.  

An alternative approach 
31.	Having reached that view we have found it convenient to check it by approaching the issue in the appeal from the point of view of the Directive. We emphasise that this point was not argued before us and so this paragraph and paragraphs 32 and 33 do not form part of the reasons for our Decision. The Directive provides that the taxable amount should be reduced by the amount which is not paid to the supplier. .In this appeal if the amount of output tax due each quarter were reduced by the amount of output tax on the bad debts the results would be:

		Accounting period ending in
			06/04		09/04		12/04		Totals
									Three periods
Output tax 
on all supplies		£308,119	£261,382	£46,563		£616,064

Reduced by tax on
bad debts		£115,642	£177,492	£20,600		£313,734		
			-----------	-----------	---------		------------
Output tax due
		£192,477	£  83,890	£25,963		£302,330
			-----------	-----------	----------		-----------

32.	If we were then to reduce the input tax claimed by the amounts of output tax due the result would be:

Input tax credit 		£242,014	£200,968	£40,311		483,293
claimed	

Less output tax due	£192,477	£  83,890	£25,963		£302,330
			-----------	-----------	----------		----------

Balance of input tax due
To Appellant 		£  49,537	£117,078	£14,348		£180,963*

* with the adjustment menti0oned in paragraph 15 above this is the amount claimed by the Appellant. 			
33.	It will be seen that the application of the principles in the Directive also lead to the conclusion that the Appellant’s claim is valid, although it is seen as input tax credit claimed rather than bad debt relief claimed. This confirms to us that the Appellant’s claim is in accordance with the principles in the Directive. 

The two questions 
34.	In the light of our conclusion in paragraph 30 we now turn to consider the two questions raised by the arguments of the parties. The first question is whether the Appellant was entitled to a refund even though the amount of the refund claimed did not relate to specified unpaid invoices.

35.	Section 36(1) provides that the taxable person should have “paid VAT on the supply” not that he should have paid all the tax on all his supplies. Regulation 167(b) provides that the claimant must hold “in respect of each relevant supply” documents showing that he has accounted for “and paid the VAT thereon”. 

36.	It will be seen from our findings of fact that the Appellant rendered a large number of unpaid invoices for total amounts in excess of £1.7M. The smallest was for £15.75 and the largest for £33,819.04. Having seen a schedule of the invoices we formed the view that it would have been possible for the Appellant to identify, out of all the unpaid invoices, a number the tax on which together would total the amount of the refund claimed. However, it was argued for Customs that there was no mechanism in the legislation for tax paid to be allocated to specific supplies in any particular order and it should not be open to the taxable person to choose to which supplies the tax paid should be allocated. 

37.	We accept that there is nothing in the regulations dealing with this position. Regulation 170 contains provisions about the attribution of payments and provides that, where the claimant has made more than one supply to a purchaser, and a payment is received in relation to those supplies, the payment is to be attributed to the supply which was earliest in time. Regulation 170 was considered in Abbey National where one of the issues was whether regulation 170 was consistent with the Directive. The High Court held that it was and that it was effective. On the other hand there is no regulation dealing with the attribution in the present appeal of tax on unpaid invoices to particular invoices.

38.	The question then arises as to whether the absence of a regulation should deprive the Appellant of a relief which is provided for by the Directives. We are of the view that it should not. We should interpret the national legislation which is there to give effect to the spirit and purpose of the Directives and this is best done by allowing the Appellant the relief claimed. 

39.	The second question arising from the arguments of the parties is alternative to the first and is whether the Appellant was entitled to a refund where only part of the tax chargeable on a supply had been paid but limited to the amount of the tax paid. As we have answered the first question in favour of the Appellant we do not need to answer this question. If  we had had to answer it our view would be that the Appellant was entitled to a refund where only part of the tax chargeable on a supply had been paid but that any refund should be limited to the amount of tax paid by the Appellant. Our reason for this conclusion would be that it would best accord with the principles in the Directives. 

Decision
40.	Our Decision on the issue for determination in the appeal is that the Appellant is entitled to a refund of  £179,743.98 as claimed. 

41.	The appeal is, therefore, allowed 

DR NUALA BRICE

CHAIRMAN

RELEASE DATE: 13 March 2008

LON/2006/1376
12.03.08