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Payment of Compensation?

6th Mar 2017
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Payment of Compensation, or Agreed Reduction in Consideration?

Around £50,000 of VAT was at stake in this case, T P Brady [2017] UKFTT 094.

Mr Brady owned a property, and let it to Allito Color Group Ltd, a company connected to him, and controlled by him. The property was opted, and rent was £20,000 per month. Mr Brady accounted for output tax on the rent.

The company went into liquidation in 2011. The liquidator claimed that Mr Brady owed the company £1.4m. He tried to claim that money back from Mr Brady under s239 of the Insolvency Act 1986. After years of negotiation, Mr Brady paid £300,000 back to the liquidator on behalf of the company. And, he issued a credit note to the company for the same amount. This was a credit against rent previously paid, and included a sum of VAT (£45,958.33), which presumably Mr Brady claimed on his own VAT Return.

HMRC’s argument (apparently not very clear!) was that the sum paid amounted to compensation paid so that the liquidator would not pursue the claim against Mr Brady. The evidence to the Tribunal pointed against this argument.

The Tribunal, methodically, went to the Principal VAT Directive (PVD), article 90, which deals with part payments and refunds. This is reflected in UK Law in Regulation 38. The Tribunal strongly held that the £300,000 was “a repayment of rent” (para 24).

HMRC referred to the British Shoe Machinery Co Ltd Tribunal case, which is a standard case on Credit Notes. The Tribunal was cautious in its response, as there was no reference to European Law, and of course the PVD long post-dates the decision (1977).

The Tribunal found in favour of the taxpayer, so that the repayment did represent a reduction in consideration for the supply. Mr Brady was entitled to make an adjustment to his VAT. Of course, whether the liquidator could make a corresponding adjustment to the liquidated company would be a matter of debate!
The decision will not have wide implications, of course, but does contribute towards any discussion of consideration for a supply. The decision is here: http://financeandtax.decisions.tribunals.gov.uk//Aspx/view.aspx?id=9594

 

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