Policy paper

Revenue and Customs Brief 1 (2017): VAT - historical bad debt relief claims

Published 28 March 2017

Purpose of this brief

This brief sets out HM Revenue and Customs’ (HMRC) position on claims for historical bad debt relief following the Court of Appeal’s judgments in British Telecommunications of 11 April 2014 and GMAC UK Plc on 25 October 2016.

Readership

VAT registered businesses that suffered bad debts on supplies they made between 1 January 1978 and 19 March 1997 and that didn’t adjust the VAT on such debts.

Background

The UK VAT Bad Debt Relief scheme was introduced in 1978. Since then the conditions of the scheme have changed:

• before 1 April 1989, the scheme required the defaulting customer to be formally insolvent
• until 19 March 1997, there was also a condition that title in any goods must have passed to the customer

The litigation concerned the bad debt relief legislation that existed between 1978 and 1997 and doesn’t affect the current scheme set out in Notice 700/18 Relief from VAT on bad debts.

The Court of Appeal found that the above 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. The outcome of the litigation is, therefore, that:

• 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 hasn’t been previously reclaimed - claims not subject to capping

Evidence

In addition to where title in goods passed on supply, between 1989 and 1997, Notice 700/18 made clear that title in goods would pass, and therefore bad debt relief would apply, where either of the following occurred:

• goods in question had been sold on to a third party by the debtor
• supplier chose to write to their customer and give up title in the goods to them

It’s therefore 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 haven’t previously claimed relief, claims will need to meet the requirements set out in conditions 1 to 5 in paragraph 2.2 of Notice 700/18.

If a business can’t meet these requirements it will need to satisfy HMRC by other means that it didn’t previously obtain bad debt relief. HMRC will consider alternative evidence for amount and methodology. The responsibility is on the claimant to show:

• that they suffered bad debts on supplies of goods made under retention of title terms
• they didn’t previously claim relief
• the amount claimed is correct

Claims already with HMRC will be dealt with in line with this brief although we may need to contact claimants for further information. New claims should be made in writing, quoting Revenue and Customs Brief 1 (2017), and sent with full supporting evidence to:

HMRC
VAT Error Correction Team
Spur F
Grayfield House
5 Bankhead Avenue
Edinburgh
EH11 4AE