VAT Bad Debt Relief Account
Sometimes HMRC Officers may be accused of ‘splitting hairs.’ But the law is the law. And, if the law imposes a specific obligation on a taxpayer, any non-compliance may lead to unwelcome consequences, including an assessment, with penalties and interest.
Regency Factors Ltd  EWCA 103 is one such decision. The taxpayer provided factoring services to its clients. The accounting system as described in the FTT decision was certainly complex. (www.bailii.org/uk/cases/UKFTT/TC/2019/TC07010.html ) A substantial sum was claimed under VAT Bad Debt Relief provisions. HMRC said the claim was invalid. In part, the assessment was issued because of the taxpayer’s alleged failure to comply with the record-keeping requirements in VAT Regulations 168 and 169.
Para 117 of the FTT decision reads:
"Regulation 169 requires a company which claims BDR to keep certain records as set out in regulation 168(2). The appellant says it does so, and I have no reason to doubt that it keeps the records as listed. But s 168(3) requires them to be kept “in a single account”, to be known as “the refunds for bad debts account”. It is in this single account that the writing off must be recorded. But the appellant says it does not have a single account. It has a “Bad Debts Write Off Account” which Mr Farrell refers to in his second witness statement. In my view the record keeping by the appellant is insufficient to comply with regulation 168 and particularly paragraph (3). The purpose of having a single refunds for bad debts account in which write offs are shown is to establish an audit trail that HMRC investigators can easily check.”
The Court of Appeal, from para 22, considers the domestic legislation. At para 33, the Court stated that it was common ground that the taxpayer had not maintained a singe account as required by Reg 168(3). Witness evidence had been given to the FTT to that effect.
The Court commented, following the FTT and UT, that a single Bad Debt Relief account provided an audit trail for HMRC Officers to check. The taxpayer had not maintained one, so the appeal was dismissed.
This is the Court of Appeal decision: www.bailii.org/ew/cases/EWCA/Civ/2022/103.html
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Hi, I am a VAT Consultant, part of the team at vatadvice.org We are based in Cambridgeshire. We work largely with charities but also advise a range of commercial organisations.
I have over 30 years experience in VAT, and am currently also a part-time member of the Tax Tribunals.