Dilatory accounting cost Dixons £1.8m
The delay in adjusting the daily gross takings figures for dishonoured cheques was far too long, says court. The VAT paid on the bad debts could not be reclaimed.
This case requires you to think back to a time when many large payments were made by cheque, and some cheques bounced. The dishonoured cheques affected the sales revenue and VAT paid by Dixons Retail Plc (TC07486) between January 1997 and January 2003.
A practical example will highlight the issues:
Jones Electrical Store sold a cooker to Steve on 31 March 2019 and Steve paid £360 including VAT by cheque. Jones correctly included this amount in its daily gross takings (DGT) for that day and paid output tax on its March 2019 return.
Five days later, Steve’s cheque was returned by the bank with the reference: “refer to drawer” (ie it bounced), and Steve never paid his debt to the store. Jones therefore reduced the value of their DGT on 5 April by £360, meaning a reduced output tax payment of £60 on the June 2019 return.
This approach is totally correct for VAT purposes but Dixons did not adopt the same accounting process.
The problem for Dixons was that, unlike Jones, the retailer did not reduce its takings figures for dishonoured cheques, perhaps because it was optimistic that the debts would be eventually paid.
Somewhat incredibly, the dishonoured cheques for the VAT periods between January 1997 and January 2003 were not picked up until September 2011, when the company submitted a voluntary disclosure to HMRC to recover overpaid output tax of £1,876,141.
HMRC rejected the claim on the basis that it was relevant to errors made on VAT returns submitted more than four years ago, ie the disclosure was out of time.
Second bite of cherry
Not to be outdone, the taxpayer reviewed the position and included the same amount as a reduced output tax figure on its January 2018 VAT return, which was more than 15 years after the original sales.
Dixons’ logic was that the retail scheme regulations did not specify at what point in time a reduction in DGT had to be made for dishonoured cheques, only that there was an entitlement to make it when it (Dixons) decided.
The fact that 15 years had passed since the original cheques bounced was irrelevant, ie no past errors had been made on returns.
HMRC disagreed and raised an assessment on the basis that the DGT figure for bounced cheques should have been adjusted in the period when the cheques were dishonoured, as with the Jones store in my example. If an adjustment was not made on that VAT return, it related to an error where the four-year time clock started ticking.
The judge agreed with HMRC: “Permitted deductions from the DGT were to be made in the Prescribed Accounting Period in which the entitlement to the deduction arose.” The appeal was dismissed.
A basic principle of VAT is that it is payable on consideration received for taxable supplies of goods or services. If there is no consideration, then no VAT is due.
There are exceptions, eg output tax is due on the value of goods supplied without payment to a business owner, say a publican having free drinks from the bar.
It is important that the DGT figure is adjusted for each period by retailers for bounced cheques and other non-payments eg till differences (but not stolen cash from the till because a sale has already been made).
Going back to Jones, what would have been the position if a customer was entitled to buy goods from the store on an account basis with 60 days credit before payment was due? In this case the output tax is still part of DGT for the day when the sale is made, rather than the payment date.
However, if the annual turnover of the retailer is less than £1m, the business can make a debtors adjustment on each VAT return (see VAT Notice 727, para 4.5).