United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2006] UKVAT V19589

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PSI Engineering Ltd v Revenue & Customs [2006] UKVAT V19589 (24 May 2006)

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 2^nd August 2001.

The Facts

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.

By letter of 2^nd 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.

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

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

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

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

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.

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

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

4 The Appellant has had various complaints, not relating to the Hearing, but in matters relating to HMRC's dealings.

The Respondents Arguments

1 HMRC say that the issues in this Appeal were determined on 5^th 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.

The Tribunal's reasons and conclusions are given below.

1 The Appellant appeals by Notice of Appeal dated 25^th October 2001 against the decision of HMRC to amend the Appellant's VAT Return for the period 04/01. The Return dated 16^th 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.

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.

3 By letter of 2^nd 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 5^th 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.

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.

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.

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 5^th 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.

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 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 2^nd February 2006.

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