Tag Archives: vat-payment

VAT: Bad Debt Relief – Increase due to coronavirus. A guide

By   17 April 2020
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The current coronavirus pandemic has thrown up unprecedented difficulties for society as a whole and significant difficulties for commerce. We have considered UK Government’s VAT assistance in previous articles, here here here and here and this is clearly welcomed.

What has become clear is that businesses and consumers will fall into default in increasing numbers as the economy worsens and it is anticipated that the ability to settle of debts on time will significantly decrease and it is apparent that many debts will never be settled. Consequently, it appears timely to look at the available relief.

The VAT position

VAT registered businesses usually account for tax on an accruals basis (but see CAS) and will therefore be required to account for output tax in the same VAT period as an invoice is issued to a customer. If that invoice is not paid and a bad debt arises this would mean that tax has been accounted for on a payment which has not been received.

Relief

Anything which can relieve the burden of VAT is to be welcomed, especially in such trying times. So VAT Bad Debt Relief (BDR) is a useful tool if a business is aware of it and understand when it may be claimed.

It is at the very least frustrating when a client does not pay, and in some cases this situation can lead to the end of a business. At least the VAT charged to the client should not become a cost to a supplier. The BDR mechanism goes some way to protect a business from payment defaulters.

There is a relief however, as normal with tax, there are specific conditions:

Conditions for claiming BDR

The supplier must have supplied goods or services for a consideration in money and must have accounted for and paid VAT on the supply. All or part of the consideration must have been written off as a bad debt by making the appropriate entry in the business’ records (this does not have to be a “formal” procedure and need not be notified to the customer). At least six months (but not more than four years and six months) must have elapsed since the later of the date of supply or the due date for payment.

Records required

Various records and evidence must be kept (for four years from the date of claim), in particular to identify:

  • the time and nature of the supply, the purchaser, and the consideration
  • the amount of VAT chargeable on the supply
  • the accounting period when this VAT was accounted for and paid to HMRC
  • any payment received for the supply
  • entries in the refund for bad debts account
  • the accounting period in which the claim is made

Procedure for claiming BDR

This part is straightforward: The claim is made by including the amount of the refund in Box 4 of the VAT Return for the period in which the debt becomes over six months old. The amount of BDR is either set-off against output tax due, or may create a refund position with HMRC.

Repayment of refund

Repayment of VAT refunded is required where payment is subsequently received or where the above conditions have not been complied with.

Adjustment of input tax for the debtor

Businesses are required to monitor the time they take to pay their suppliers and repay input tax claimed if they have not paid the supplier within six months. Subsequent payment of all or part of the debt will allow a corresponding reclaim of input tax. This is an easy assessment for HMRC to make at inspections, so businesses should make reviewing this matter this a regular exercise.

Finally, there is tax point planning available to defer a tax point until payment is received for providers of continuous supplies of services. Please see here

More on general VAT payment problems here.

VAT Latest from the courts – Allocation of payments

By   13 March 2017
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VAT payment problems

In the Upper Tribunal (UT) case of Swanfield Limited (Swanfield)

The matter was whether HMRC had the right to allocate payments made by the applicant to specific periods against the wishes of the taxpayer.

Background

Swanfield was late with returns/payments such that it was subject to the Default Surcharge (DS) mechanism.  Details of the DS regime here

HMRC issued DSs to Swanfield, many at the maximum rate 15%. The total involved was said to be over £290,000. However, if the payments made by Swanfield had been allocated in a certain way (broadly; to recent debts as desired by the taxpayer) it would have substantially reduced the amount payable. However, HMRC allocated the payments to previous, older periods which were not the subject of a DS.

The Issue

The issue was relatively straightforward; did HMRC have the authority to allocate payments as they deemed fit, or could the taxpayer make payments for specific periods as required?

The Decision

The UT found that Swanfield were entitled to allocate payments made to amounts which would become due on supplies made in the (then) current period, even though the due date had not yet arrived.  Additionally, HMRC did not have the authority to unilaterally allocate payments made by the taxpayer to historical liabilities as they saw fit, in cases where the taxpayer has explicitly made those payments in relation to current periods.  In cases where there is no specific instruction in respect of allocation of the payment, HMRC was entitled to allocate payment without any obligation to minimise DS. The UT remitted this case back to the First Tier Tribunal to decide, as a matter of fact, whether Swanfield had actually made the necessary allocation.

Commentary

This is a helpful case which sets out clearly the responsibilities of both parties.  It underlines the necessity of a taxpayer to focus on payments and how to manage a debt position to mitigate any penalties.  Staying silent on payments plays into the hands of HMRC. It is crucial to take a proper view of a business’ VAT payment position, especially if there is difficulties lodging returns of making payment. Planning often reduces the overall amount payable, or provides for additional time to pay (TTP).  A helpful overview of payment problems here

Things can be done if a business is getting into difficulties with VAT; whether they are; reporting, submitting returns, making payments, or if there are disputes with HMRC. There are also structures that may be put in place to assist with VAT cashflow.

We would always counsel a business not to bury its head in the sand if there are difficulties with HMRC.  Please make contact with us and, in almost all cases, we can improve the situation, along with providing some relief from worries. VAT may be payable, but there are ways of managing payments – as this case demonstrates.