VAT bad debt relief

In these days of uncertainty and unpaid bills, businesses must seize every opportunity to obtain VAT relief from bad debts. HMRC carefully reviews bad debt relief claims and may try and restrict claims in respect of “VAT only” invoices.

This position was challenged in the Upper Tribunal case of Simpson & Marwick FTC/85/2010, where VAT bad debt relief claims were allowed on the full VAT amount charged on VAT invoices despite the net amount invoiced having been paid by an insurance company.

HMRC contended, and the First-tier Tribunal agreed, that VAT bad debt relief claims should be restricted to the VAT element of the amount outstanding.

The total amount of the VAT bad debt relief claim by Simpson & Marwick was £216,862.36, which related to VAT charged on invoices issued to VAT registered insured businesses. The appellants issued their invoices in duplicate where the insured party was registered for VAT. The principal fee note claiming payment only of fees and outlays was sent to the insurer. A duplicate was sent to the policyholder, who was asked to pay only the VAT on fees and outlays. In a covering letter issued by Simpson & Marwick, the insured person was told they would not be out of pocket because they should be able to recover any VAT charged as input tax. This practice is in accordance with HMRC policy where the suppliers are instructed by the insurers that the insurers will pay the fee element and the insured party will pay the VAT. 

The Upper Tribunal disagreed with HMRC and the First-tier Tribunal. It decided that the amount outstanding entirely consisted of VAT and that it was not correct to apportion the VAT bad debt relief claim between the net fee element and the VAT charge.

This decision may enable VAT bad debt relief to be claimed on other VAT only invoices and will certainly enable VAT bad debt relief to be claimed where part of the invoice is paid by an insurance company and part i.e. the VAT, is to be paid by the policyholder.

For further details on how this may affect your clients, please contact TaxDesk on 0845 4900 509 and ask for Vaughn Chown