HMRC has published a brief setting out its policy on the scope for claims for VAT bad debt relief on supplies made between 1 January 1978 and 19 March 1997, which has been updated following two legal rulings which found that some of the conditions previously attached to claims were disproportionate
The update on claims for historical bad debt relief follows the Court of Appeal’s judgments in British Telecommunications on 11 April 2014 and GMAC UK Plc on 25 October 2016.
The UK VAT Bad Debt Relief scheme was introduced in 1978. The litigation concerned the bad debt relief legislation that existed between 1978 and 1997 and does not affect the current scheme.
Before 1 April 1989, the scheme required the defaulting customer to be formally insolvent, while until 19 March 1997, there was also a condition that title in any goods must have passed to the customer.
The Court of Appeal found that these two former conditions were disproportionate. However, it also decided that it was too late to make claims under the scheme that existed before 1 April 1989.
HMRC says that as a result, claims relating to bad debt relief on any supplies made prior to 1 April 1989 will be refused.
Claims relating to supplies of goods made between 1 April 1989 and 19 March 1997 will be paid subject to satisfactory evidence that the bad debts occurred and that the VAT has not been previously reclaimed - claims not subject to capping.
In addition, between 1989 and 1997, the regulations made clear that title in goods would pass, and therefore bad debt relief would apply, where either one of two actions were undertaken.
One was where the goods in question had been sold on to a third party by the debtor, and the second was when the supplier chose to write to their customer and give up title in the goods to them.
As a result, HMRC says it is possible that businesses may have previously claimed relief during this period under these terms.
HMRC considers this unlikely to be the case in circumstances where businesses routinely repossessed high value goods following default by the customer. It is more likely that VAT bad debt relief may have been claimed where, for example, goods were supplied to customers who purchased the goods for resale.
To ensure that any businesses making claims in the light of the GMAC case have not previously claimed relief, claims will need to meet the requirements set out in conditions 1 to 5 in paragraph 2.2 of the current scheme set out in Notice 700/18 relief from ~VAT on bad debts.
If a business cannot meet these requirements it will need to satisfy HMRC by other means that it did not previously obtain bad debt relief.
In such circumstances, the responsibility is on the claimant to show that they suffered bad debts on supplies of goods made under retention of title terms; they did not previously claim relief; and the amount claimed is correct.
Policy paper Revenue and Customs Brief 1 (2017): VAT - historical bad debt relief claims is here: https://www.gov.uk/government/publications/revenue-and-customs-brief-1-2...
VAT Notice 700/18: relief from VAT on bad debts is here.
