19324

VAT – Bad Debt Relief – Section 36 VATA and relative Regulations – requirements and circumstances relating to claims, including notification to debtor – Appeal refused.

EDINBURGH TRIBUNAL CENTRE

	ALARMOND LTD	Appellant

	- and -

	HM REVENUE & CUSTOMS	       Respondents

		Tribunal:	 (Chairman):  Mr Kenneth Mure, QC
				 (Members):	  Ian M P Condie, CA
						  Miss Karen Bruce Lockhart, Advocate

Sitting in Edinburgh on Wednesday 28 September 2005

for the Appellant		Mr John Lynch, CA

for the Respondents	Mrs Joanna Clark, Shepherd & Wedderburn, WS

© CROWN COPYRIGHT 2005.

DECISION

Introduction
This Appeal relates to the Appellant’s eligibility to bad debt relief in terms of Section 36 VATA in respect of output tax of £10,500 recorded on an invoice issued by it and dated 18 May 2000.  The transaction bears to relate to the sale of a Cessna Aeroplane (Document 10).

This matter has been the subject of an earlier Tribunal Hearing (Document 12) and a Court of Session action which was abandoned by the Appellant.  Briefly that Tribunal considered, having heard the late Mr James McAuley, a director and principal shareholder of the Appellant, and other evidence, that the transaction was one liable to VAT, with a duty on the Appellant as issuing the invoice to account for £10,500 as output tax.

It is noted in the Tribunal’s decision that the circumstances were uncertain and bizarre.  This might extend to the matter of payment of consideration.  However, this Tribunal did not hear further evidence (other than the Witness Statement of Mrs Parkes, an officer of the Respondents, which was not challenged) and we cannot review the earlier Tribunal decision.  Our task is simply to consider whether a valid claim to bad debt relief has been made for the purposes of Section 36 and satisfying the relative regulations.

The Law
Section 36 VATA 1994 provides-
“(1) Subsection (2) below applies where –

(a)	a person has supplied goods or services and has accounted for and paid VAT on the supply;
(b)	the whole of or any part of the consideration for the supply has been written off in his accounts as a bad debt, and
(c)	a period of 6 months (beginning with the date of the supply) has elapsed.

(2) Subject to the following provisions of this section and to regulations under it the person shall be entitled, on making a claim to the Commissioners, to a refund of the amount of VAT chargeable by reference to the outstanding amount”.

Subsection (5) provides for the making of regulations specifying the requirements for making a claim under Section 36.

In particular Regulation 165A (SI 1995/2518) provides that a claim shall be made within 3 years and 6 months of the later of the due date of payment or the date of supply.

Regulation 166A provides for a notice in a particular form to be issued to the purchaser within 7 days of the claim.

Regulation 168 provides for certain detailed records to be kept in the event of a bad debt claim being made.

Additionally Mrs Clark referred us to the following-

Esso Petroleum v Law (1956) SC33
Taylor Tunnicliffe Ltd (MAN/03/0043)
Stair Memorial Encyclopaedia – Evidence – res judicata 

The Facts
The Written Statement of Mrs Parkes was not challenged.  In addition the documentation produced by both sides was not challenged as being copies of documents issued or exchanged by the Parties or received by them as relative to the matter in dispute.  For the purposes of this Hearing we consider that the following particular Findings in Fact can appropriately be made:

1.	The Appellant carried on business as a Limited Flying Club from 1987 to 2002.
2.	It was registered for VAT from 1 April 1987 and then de-registered on 2 November 2002.
3.	On 4 July 2003 the Respondents raised an assessment in respect of output tax due in respect of the sale of an aircraft in the amount of £10,500.  The relative Invoice is included in Document 10.
4.	Documents nos 5, 7 and 14 are copies of letters from Mr Lynch CA on behalf of the Appellant to the Respondents.
5.	The Respondents refused the Appellant’s claim for bad debt relief in respect of the output tax of £10,500 due, but allegedly unpaid, in respect of the sale of the aircraft.  Reference is made to Documents 4 and 6 from them.
6.	Appellant’s Document 8 is a copy of its accounts for the year to 30 September 2000.
7.	Appellant’s Document 10 is a copy letter from the CAA to the Appellant’s accountants, Messrs John Lynch & Co dated 14 July 2005 with relative data bearing to relate to the Cessna aircraft, referred to in the said invoice (Document 10).

Appellant’s Submissions
Mr Lynch submitted that a timeous claim for bad debt relief had been made.

The first aspect to consider was the relevant date of sale and he submitted that the invoice date, viz 18 May 2000 was not necessarily the appropriate date.  He argued that there were 2 later dates which were more appropriate.  Firstly, he referred to the documentation provided by the CAA (Appellant’s Documents no 10).  These suggested that 28 May 2002 was the date of transfer from the Appellant’s ownership.  Alternatively, he argued, the Tribunal should have regard to March 2002, being the date when the legal action in the Court of Session to recover the plane was abandoned, as the correct tax point.

In any event he submitted that his letter dated 26 August 2003 (Document 14) was a valid claim for bad debt relief.  Since the Appellant had been compulsorily de-registered from 1 November 2002 a bad debt claim could not be included in the regular VAT Return.  He referred us to the narrative in Notice 700/18/02 on bad debt relief (Document 16).  In particular so far as the requirement to notify the debtor was concerned, he urged us to presume that proper notice had been given.  The Appellant was at a disadvantage in as much as the late Mr McAuley’s evidence was no longer available.

Finally, in relation to the Respondents’ claim for costs, he disputed that the action was in any way frivolous.

Respondents’ Submissions
Mrs Clark submitted that the appropriate date of the taxable supply was 18 May 2000.  That was the view of the earlier Tribunal and she submitted that as a finding that was res judicata.  In any event there was no basis in law for the 2 later dates suggested.  The CAA’s records produced (Appellant’s Document no 10) were not guaranteed as accurate and were dependent on the accuracy of information supplied.  They were not conclusive evidence against the possibility of an earlier transfer by the Appellant to Mr Bain.  The end of the Court of Session action had no basis in law as the relevant date for the commencement of the time limit.  Reliance had to be placed on the invoice details and date (Document 10).  

Mrs Clark argued further that there had been no valid claim made within the 3 year and 6 month period.  She submitted that Mr Lynch’s letter of 26 August 2003 (Document 10) was not a “claim” for bad debt relief, and at most an expression of opinion.  That letter had been before the earlier Tribunal, apparently, and bad debt relief had not been sought at that stage.  The first eligible claim for bad debt relief was that in terms of Mr Lynch’s letter of 24 August 2004 (Document 5).  

Additionally, there was no evidence of the appropriate notice having been served on the debtor as required by Regulation 166A.  That requirement and the time limit were mandatory and there was no scope for any discretion to be exercised by the Respondents.

She submitted further that the Appellant had not accounted for the output tax timeously in terms of Section 36(1).  An assessment had to be made and it was accepted that payment was made “under duress”.  Further, the debt had not been written off in the Appellant’s business accounts as a “bad debt” and the requirements of Regulation 168 anent records to be maintained for “bad debt” claims had not been satisfied.

In these circumstances Mrs Clark urged us to refuse the Appeal.  She sought Costs on the basis that it was a vexatious exercise.

Decision
We consider that the date of the transaction is 18 May 2000 in terms of the Invoice (Document 10).  That was the view of the earlier Tribunal, which we cannot review.  In any event we do not find Mr Lynch’s arguments in support of either of the later dates suggested, plausible.  The end of the court action in March 2002 is irrelevant in our view.  We were not referred to any authority which might support that date as creating the VAT liability.  We consider that the date of the CAA’s notification i.e. 28 May 2002, is also irrelevant.  It does not bear to be conclusive and does not exclude the possibility of an earlier transfer of the property in the plane between the Appellant and Mr Bain, who then transferred to Mr Cation.  The sale would be subject to Sale of Goods Legislation, with (ordinarily) property passing on completion of the contract.  Thus the invoice date is not displaced as the date of the transaction for VAT purposes.

We are satisfied that no valid claim for “bad debt” relief was made until Mr Lynch’s letter of 24 August 2004 (Document 5).  That was out of time being over 3 years and 6 months after the due date.  With some hesitation we reject the earlier letter of 28 August 2003 (Document 14) as a satisfactory claim.  Since the Appellant was de-registered for VAT purposes in November 2002, we accept that he could not claim in terms of his VAT Returns.  However, in our view a valid claim should be in unambiguous terms.  The wording of Document 14 does not satisfy that, viz “as an alternative we consider that our client would be entitled to claim Bad Debt Relief in respect of the sum of £10,500”.  Significantly the later letter of 24 August 2004 (Document 5) makes no reference to any earlier claim.  It states “…    we now apply for the appropriate bad debt relief …”.  Both letters are from Mr Lynch.  Document 14 pre-dated the first Tribunal Hearing and, apparently, was before it.  The earlier Notice of Appeal was not produced but it is clear that the matter of bad debt relief was not then argued.  It occurs to us that this could possibly have been presented as a reserve case on an “esto” basis on an alternative hypothesis of fact.  (We appreciate, of course, that the Appellant was not represented by Mr Lynch on the earlier occasion).  Document 5 notifying the “bad debt” claim follows the first Tribunal Hearing.

In any event no form of notice was issued to the debtor anent the “bad debt” claim to satisfy Regulation 166A.  For that reason alone this Appeal must fail.  While the Respondents have a certain discretion in respect of some matters affecting the eligibility of a claim, that does not extend to the matter of serving notice on the debtor or time-limits (see Regulation 171(3)).

A few days after this Hearing Mr Lynch submitted copy documents dated 29 September 2005, bearing to be a “form 427” claiming bad debt relief for the £10,500, the subject of this Appeal, together with a form of written notice to the debtor.  We were not, of course, addressed on these and we had no reason to anticipate their receipt.  To satisfy Regulation 166A the Notice must be issued within 7 days of the claim being made.  Here, that claim (as we have held) was made by Document 5, dated 24 August 2004.  A duplicate claim now cannot enable a belated notice to be served timeously.  Accordingly we disregard these further items of correspondence.

So far as the requirement to write off in the business accounts the sum claimed as a bad debt, we consider that this is satisfied.  In the accounts to September 2000 (Appellant’s Documents no 8) the plane has been removed as an asset in the Balance Sheet apparently and a corresponding deduction (“net loss on sale of assets”) has been made in the Profit & Loss account.  However, that in itself does not save the Appellant’s case.

Finally, certain records must be kept in respect of a “bad debt” claim under Regulation 168.  This liability seems to arise on the making of such a claim.  These are to be entered in a “refunds for bad debts account”.  These were not kept apparently and we refer to the Witness Statement of Mrs Parkes.  (This requirement can be waived on a discretionary basis – see Taylor Tunnicliffe Ltd).

In the circumstances this Appeal is refused.

Costs
In the event of success the Respondents sought costs as the Appeal was in their view “vexatious”.  We disagree, and we make no such award.  A “bad debt” claim has been under consideration and some reference was made to it at the earlier Tribunal.  While we have not investigated the whole factual circumstances, it would be unfortunate (to say the least) that if a due consideration has not been received by the Appellant, it (and effectively the late Mr McAuley’s estate) should remain liable in respect of the relative output tax.

Finally, we would thank both Mrs Clark and Mr Lynch for their assistance.

MR KENNETH MURE, QC

CHAIRMAN

RELEASE:  2 NOVEMBER 2005

EDN/05/43