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Reverse charge supply and VAT clawback on debt

Is VAT on a reverse charge clawed back if debt is > 6 months overdue?

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Client has received services from overseas subject to reverse charge. Debt is over 6 months old. Is the input element of the reverse charge now disallowable (as it would be for a straightforward UK VAT debt)? I assume so but have not come across it before and have yet to find specific guidance.

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By paul.benny
05th May 2020 14:36

If the supplier was in the UK, he would recover the unpaid output tax and the customer would write back the input tax. Result: no net loss of tax to HMRC.

It would seem logical for the reverse charge treatment to mirror that - so write back both input and output tax.

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Replying to paul.benny:
By paulwakefield1
05th May 2020 14:58

I can see the logic but whoever said VAT was logical! My concern is, to extend the UK analogy, that the supplier would have to write off the debt to recover the VAT. This debt is still payable and still recognised by the supplier as such.

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By Les Howard
05th May 2020 14:55

Really interesting question. I have checked the VAT Regulations on BDR and found no reference to Reverse Charge.
I agree with Paul Benny.

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By paulwakefield1
06th May 2020 08:38

I am afraid this question has been nagging at me so I have been digging a bit further.

For what it is worth, I came across this post on the HMRC forum (extract only):
“………………... Does the UK business have to repay to HMRC the input VAT previously reclaimed under Ref 172H of the 1995 VAT Regs?
Posted 2 months ago by HMRC Admin 11

Yes, the UK business would have to repay the input tax.

Please refer to Section 4 of VAT Notice 700/18 – Relief from VAT on bad debts. Paragraph 4.1 ………………… “

This prompted me to try to thread my way through the legislation.

The actual VAT repayment requirements on an old debt are in Part XIXB 172H where it states it applies where a deduction has been claimed “on the supply as input tax”. The question is whether it was input tax that was claimed. I find the legislation opaque on this matter but Notice 741A is clear that HMRC consider the application of the reverse charge to be input tax.

Consequently I am pretty confident that the input tax does indeed have to be repaid after it is 6 months overdue and I do not think the other respondents disagree.

Turning to the output side, the reverse charge means that the recipient of the supply is deemed to have also made the taxable supply (VAT Act 1994 S8 as amended). One of the conditions for claiming relief under S26 where a supply has been made is that the debt has been written off.

So the legislation would appear to give the result that the input tax has to be repaid but relief from the output tax can only be gained either when the debt is paid or the debt is written off. What would be a legitimate write off when the supplier is also the creditor is interesting; presumably the debt would have to be written off by the actual supplier or possibly time barred.

Which gives the manifestly unfair result that a VAT cost is created “out of nothing”, albeit possibly temporary, on an overseas supply where no VAT was charged by the supplier.

Whilst I greatly respect the views and logic of the two previous respondents, this does appear to be what the legislation says. I would be absolutely delighted if they (or anyone else) could shoot my argument down in flames.

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Replying to paulwakefield1:
By paul.benny
06th May 2020 11:10

It's an unusual situation to have both a reverse charge and to have not paid the supplier within 6 months. When do you anticipate making payment?

I see where you are coming from regarding the legislation - but as you say, it is manifestly unfair to create a VAT expense here. For that reason, I would still write back both input and output tax. If the amount of VAT was large I might provide an equivalent amount until the supplier was paid in case the matter was picked up during a VAT inspection.

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