Unusual accounting system denies VAT bad debt claim

In Regency Factors PLC v HMRC EWCA Civ 103, the Court of Appeal (CoA) dismissed a claim for VAT bad debt relief by a company which did have bad debts but which was unable to claim them in the prescribed way: its accounting system would not facilitate a proper claim.

• Regency Factors Limited (Regency) claimed Bad debt relief for VAT as bad debts reduced the amount of VATable consideration received for goods and services.
• Regency could not allocate the debts to specific invoices due to its internal accounting system.
• Instead, bad debts were monitored in terms of individual clients.
• HMRC raised enquiries and issued closure notices denying the claims as they had not been calculated in line with the legislation which required a single bad debt relief account to allocate bad debts to specific supplies.

Regency appealed to the First Tier Tribunal which concluded that bad debt relief was not available as:

• There was no bad debt.
• Regency had not complied with the legislative requirements to claim the relief.

Regency appealed to the Upper Tribunal who accepted that:

• While there was a bad debt,
• No relief was available as the legislative requirements had not been met.

Regency’s appeal to the CoA under EU law grounds was dismissed as:

• EU law granted member states discretion to implement bad debt relief in a way that it saw fit provided it met specific principles.
• UK legislation made it necessary to identify a particular supply against which bad debt relief was claimed.
• This condition was within the discretion of the domestic legislator and offered an easily identifiable audit trail for HMRC to ratify the claim.
• The inclusion of this condition in the UK tax code was not ‘impossible or excessively difficult to fulfil’ – if it had been an EU law challenge could have been considered.
• Regency had failed to meet the requirements of the domestic legislation, the domestic legislation was compatible with EU law and no bad debt relief was available.

Useful guides on this topic

Bad debts: VAT recovery
When can you recover VAT on a bad debt? How much VAT is payable to HMRC or recoverable from HMRC when only part of an invoice is paid? 

External links

Regency Factors PLC v HMRC EWCA Civ 103