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TaxationWeb asks, how can taxpayers and advisers trust HMRC when they can get basic advice so badly wrong?

Introduction

I think it’s good that we let HMRC do Guest Editorials occasionally. It’s important that we operate fairly and let HMRC tell its side of the story. It also means I have less of a guilty conscience when I have a rant. (For which, see below).

And every once in a while, we do get some nuggets in amongst the ‘spin’ which Maths finds so frustrating (Editorial - HMRC Please Stop Wasting Our Time!). I imagine that some of Dave Hartnett’s apparent expression of astonishment at being continually cast as the villain in the public press is perhaps due to the fact that he’s never made any secret of his position over ‘doing deals’ with taxpayers when he finds it appropriate - see HMRC Offers Settlement Deal for EBTs - "Disguised Remuneration". (Although it's probably also fair to say that the affairs of the vast majority of taxpayers will never be so complex that they might benefit, so the accusation that there's one rule for the ultra-rich and another for the rest still has some legs). His approach nevertheless remains difficult to reconcile with the role of a tax assessing / collecting agency, which I should think is to work out the correct amount of tax that’s due in a particular set of circumstances and get on with collecting it in a manner which is appropriate.

Anyway, on to this week’s rant:

VAT: Bad Debts - Worse HMRC Advice

A colleague in the office asked an apparently simple question:

“How long do you get to claim your VAT back on bad debts – can you be too late?”

Now, most readers will know you have to wait 6 months to reclaim your Output VAT if a debtor doesn’t pay (unless Cash Accounting) but how long do you get, if the debt is several years old and you haven’t yet claimed?

I explained that traditionally, VAT claims were capped at 3 years, whilst for direct taxes it was 6; there was a ‘harmonisation’ process a couple of years ago so most time limits are now 4 years and in this case the clock started after 6 months. But I said I would check, and that’s when the fun began...

If we first look at HMRC’s main public VAT Guide – last revised February 2011:

Section 18.5 Can I Claim Relief from VAT on Bad Debts?

"For supplies made after 1 May 1997, claims must be made within 3 years and 6 months." Er, wrong. Or at least very misleading

Now HMRC’s specialist publication for taxpayers: Notice 700/18 Relief from VAT on Bad Debts – last revised December 2002(!)

Section 2.3 When Can I Claim Bad Debt Relief?

"For supplies made after 1 May 1997, you must claim within three years and six months of the later of, when payment is due and payable or the date of supply." Correct back in 2002 but quite wrong now.

Next, HMRC’s specialist internal technical manual for its own officers: Bad Debt Relief

What Time Limits Apply for Claiming Relief?

"A claim for bad debt relief must be made within three years and six months of the later of the following:

• the date of the supply; and
• the date when the amount became due and payable."

Still wrong!

HMRC’s specialist VAT Refunds Manual – last updated about a week ago

VR7420 - Four Year Cap - Other Provisions: Regulation 165A - Bad Debt Relief: Operation of the Time Limit

"Claims for bad debt relief can be made once six months have passed since the date on which:

• the consideration for the supply was due and payable; or
• the time of supply, whichever is the later.

However, claims cannot be made later than four years and six months after the later of the two dates mentioned above."

Finally they’ve got it right! Not in the technical guidance specifically for Bad Debts, but in the guidance for Refunds!

There’s only one other place I could find where they basically got it right:

Online Guidance – When You Can Reclaim VAT on Bad Debts

"You can reclaim VAT that you paid to HMRC and which you have not received from the customer. The conditions are that:

• the debt is more than six months old and less than four years and six months old..."

The Correct Position

The law is in a Statutory Instrument – The VAT Regulations 1995 (as amended in 2009)

S165A (to apply from 1 April 2009)

"(1) Subject to paragraph (3) and (4) below, a claim shall be made within the period of 4 years and 6 months following the later of—
(a) the date on which the consideration (or part) which has been written off as a bad debt becomes due and payable to or to the order of the person who made the relevant supply; and
(b) the date of the supply."

So Why is HMRC Wrong?

Whilst it is almost funny that HMRC can be so wrong in so many places, some serious questions do arise:

How many people have read the incorrect public guidance, been misinformed and failed to claim VAT relief to which they were legitimately entitled?

How many VAT officers will have relied on their incorrect technical guidance and told taxpayers or advisers that the time limit is capped at 3 years and 6 months?

I cannot believe that HMRC as a body is unaware of the implications of extending from 3 years to a general 4-year time limit for VAT claims; some of these guides and public notices have been revised several times since the new rules were introduced in 2009.

How can they have neglected to update the Bad Debt Relief Guides and Notices for such a fundamentally important part of the relief?

On the one hand, I can’t believe it was intentional. But I have a problem with an alternative question: if the time limits for claiming the relief had been reduced, instead of being increased, would HMRC really have been so poor at updating its guidance then?

And even when they’re right, they’re still wrong – just for a laugh, check out the worked example in VR7420

How many more "mistakes" are there in HMRC's guidance?