VAT CASES - 05.11.2019

Theft leads to successful bad debt relief claim

The case. Total Catering Equipment Ltd (T) took customer orders for goods over the phone but a dishonest employee arranged for debit card payments to be paid into his personal bank account instead of the business account.

When the problem was discovered, T proceeded with its VAT reporting by initially accounting for output tax on the stolen payments but then claiming bad debt relief (BDR) on a subsequent VAT return.

The law. BDR under the VAT rules can be claimed by a business if it has accounted for output tax on a VAT return, i.e. it does not use the cash accounting scheme where BDR is automatic, and a sales invoice is more than six months overdue for payment and has been written off in the business accounts to a bad debt expense account.

The decision. HMRC’s view was that no BDR could be claimed because the customer had paid for the goods.

It said the dishonesty was the same as if the employee had stolen cash from the till, i.e. output tax was still due in full without relief.

However, the judge said this was a different situation because the employee had made a “dishonest frolic on his own” and had not acted “within the scope of his employment” .

T was therefore entitled to claim BDR and the appeal was allowed.

Key points.This is a controversial decision that turned on very specific circumstances. Many VAT commentators feel that a reduction in daily gross takings may have been appropriate rather than a claim for BDR. However, as the case is only binding on the parties involved, HMRC’s view that output tax is still payable because a supply of goods has taken place and the customer has paid for those goods must continue to be the way to deal with this situation.

Total Catering Equipment Ltd v HMRC [2019] TC07184

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