Businesses which are required to issue VAT-only invoices for things like supplies covered by insurance claims will now be able to reclaim 100% of bad debt relief on the unpaid VAT following a tax tribunal decision.
In Simpson & Marwick v HMRC (FTC/85/2010) the upper tribunal clarified the amount of VAT debt relief for unpaid debts that can be reclaimed from the tax authorities.
Before the tribunal decision, published in December last year, HMRC only allowed 1/6th of unpaid VAT (where VAT is calculated at 20%) to be reclaimed under bad debt relief.
This means that for a bill of £1,200, (£1,000 net and £200 VAT), that the supplier would only have been able to reclaim approximately £33 of the unpaid VAT, and HMRC would have benefited by £167, George Bull, senior tax partner at Baker Tilly said in an analysis of the tribunal ruling.
In recognising that VAT legislation permits “a refund of VAT chargeable by reference to the amount of consideration so written off”, the upper tribunal has determined that, if the amount written off is only VAT all VAT must be refunded as a bad debt claim, otherwise the taxpayer is out of pocket.
It was therefore obvious to the upper tribunal that the entire amount unrecovered by Simpson & Marwick represented VAT and should therefore be refunded as if it were VAT.