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VAT Voice by Steve Allen

Steve Allen, Director of VAT Solutions (UK) Ltd, highlights a particular area of interest for HM Customs and ExciseWe are informed that the VATman is currently taking a close look at aged creditor lists and payment received from creditors in liquidation.

As you may remember changes in the 2002 Budget relating to the procedures for claiming bad debt relief (BDR) came into force on 1 January 2003.

These changes can be summarised as follows:

Sales

The requirement to send a written notification to the customer that bad debt relief was being claimed was removed.

Debtor

The purchaser has to monitor payment of invoices because once an unpaid purchase invoice is six past its issue date he will have to pay back the input VAT he has claimed to the VATman until such time as the debt is cleared.

As we predicted at the time, this has simplified the system for claiming BDR but has imposed extra burdens on the purchase side which gives the VATman the opportunity to assess businesses for VAT not repaid on outstanding creditors over six months old.

The VATman is now avidly checking aged creditor lists to see if there are any amounts over six months that have not been adjusted.

Tip

If you are having a VAT visit go through your aged creditors lists and make sure you have repaid the VAT on outstanding invoices over six months old. If you have not done so make a voluntary disclosure to the VATman so as to avoid any penalties (on any amount) and interest (if the VAT due is less than £2,000).

Bad debts and liquidation

The other area that the VATman is looking at is payments received from creditors in liquidation. The usual scenario is that a customer goes into liquidation and after six months you claim bad debt relief and get the VAT back. When a company goes into liquidation you normally give up hope of receiving any money and forget about it. Sometime later the liquidator sends you a cheque for the “dividend” and, apart from thankfully banking it, you do nothing.

The area of VAT bad debt relief relating to part payments for supplies in this situation has caused confusion for some time.

The basic rule is that when a business receives a payment from a customer after it has claimed bad debt relief it must adjust that claim and pay some VAT back. For example, if the company in liquidation owed you £1,500 plus VAT of £262.50 his total debt to you is £1,762.50. The liquidator declares a dividend of 20% so you get a total of £352.50 (£1,762.50 x 20%). The VATman treats this as VAT inclusive and will want £52.50 (£352.50 x 7/47) back. This should be adjusted on the VAT return for the period you received the dividend.

If you have not done so make a voluntary disclosure to avoid interest and penalties.

The VATman has the right to access liquidators files and will know if you have received a dividend and will check this when he comes to visit. If you have not done so he will issue you with an assessment. Remember that if you use cash account there is built in bad debt relief and will not need to make any adjustments as they will be catered for automatically when you make or receive a payment.

October 2004

Steve Allen
Director, VAT Solutions (UK) Ltd
Email: steveallen@vatsolutions-uk.com

VAT Solutions (UK) Ltd
11 Winmarleigh Street,
Warrington,
WA1 1NB

(T) 01925 242497
(F) 01925 242498
(M) 07810 433927
(W) www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc