Bad Debt Relief VAT Records – Keeping The Right Records is the subject of a post following the dismissal of the appeal by Regency Factors PLC to the Upper Tax Tribunal, in the matter of Regency Factors PLC v Revenue and Customs: [2020] UKUT 357 (TCC) and then subsequently dismissal of a further appeal at the Court of Appeal.
Why Bad Debt Relief VAT Records Are Important For You
The First Tier Tax (“FTT”) rejected Regency Factors PLC’s appeal against VAT assessments made by HMRC to withdraw bad debt relief which Regency Factors PLC appears to have claimed in its VAT returns for various accounting periods between July 2007 and January 2010.
Regency Factors PLC appears to have been claiming a considerable amount of VAT in view of the following statement in the FTT:
On 2 October 2013 the appellant now acting through Nigel Gibbon & Co (who had been in the background for some time) appealed to the Tribunal in respect of the total VAT of £164,932.
Regency Factors Ltd v Revenue & Customs (VAT – ADMINISTRATION : Bad debt relief) [2019] UKFTT 144 (TC)
Time and again in this Blog there are references to the importance of keeping company records by Limited Companies as part of Director Duties.
Bad Debt Relief VAT Records That Must Be Kept
In order to claim bad debt relief the Section 168 of the VAT Regulations 1995 sets out a series of requirements:
(1) Any person who makes a claim to the Commissioners shall keep a record of that claim.
(2) Save as the Commissioners may otherwise allow, the record referred to in paragraph (1) above shall consist of the following information in respect of each claim made —
(a) in respect of each relevant supply for that claim —
(i) the amount of VAT chargeable,
(ii) the prescribed accounting period in which the VAT chargeable was accounted for and paid to the Commissioners,
(iii) the date and number of any invoice issued in relation thereto or, where there is no such invoice, such information as is necessary to identify the time, nature and purchaser thereof, and (iv) any payment received therefor,
(b) the outstanding amount to which the claim relates,
(c) the amount of the claim,
(d) the prescribed accounting period in which the claim was made, and
(e) a copy of the notice required to be given in accordance with regulations 166A. (3) Any records created in pursuance of this regulation shall be kept in a single account to be known as the “refunds for bad debts account”.
For the purpose of this article, the VAT records at the heart of Regency Factors PLC’s appeal in this case, was the keeping of records in a single account in compliance with Regulation 168(3). The First Tier Tax Tribunal had this to say about the matter:
Regulation 169 requires a company which claims BDR to keep certain records as set out in regulation 168(2). The appellant says it does so, and I have no reason to doubt that it keeps the records as listed. But s168(3) requires them to be kept “in a single account”, to be known as “the refunds for bad debts account”. It is in this single account that the writing off must be recorded. But the appellant says it does not have a single account. It has a “Bad Debts Write Off Account” which Mr Farrell refers to in his second witness statement. In my view the record keeping by the appellant is insufficient to comply with regulation 168 and particularly paragraph (3). The purpose of having a single refunds for bad debts account in which write offs are shown is to establish an audit trail that HMRC investigators can easily check.
This failure to keep a single account for bad debt refunds is possibly a consequence of the way the appellant accounts for its business. A passage at [39] of Mr Farrell’s first witness statement is particularly telling: “As set out above the Current Account is a running account balance accordingly there is an admixture of funds and it is impossible to apportion credits to particular invoices submitted by a client and receipts from their Customer…”
And in that same witness statement where Mr Farrell gives information about particular clients in relation to whom the appellant has claimed BDR he says that the claims made to BDR are not the amounts shown on his analyses (as in §15): they may be higher or lower. HMRC had already pointed these discrepancies out. Thus in the absence of a refunds for bad debt account as required by regulation 168 it is impossible to say whether the necessary conditions for BDR have been met.
The position on the requirement for retaining bad debt relief vat records in a single account was upheld:
Regulation 168 clearly provides that a trader who makes a claim for bad debt relief must keep a record of the information required by regulation 168(2). Regulation 168(3) requires that information to be kept in a single account to be known as a “refunds for bad debts account”. Regulation 172(2) also provides that the time when consideration is taken to have been written off is when an entry is made in that account. It is common ground that the information required to be kept has not been kept in a single record or spreadsheet. Regency was obliged to keep such records in a single account. That is a clear failure to comply with regulation 168(3). Regulation 168(3) cannot be read as being inapplicable in every case where the trader has the records stored separately from the single account. The language of the regulation is plain, and Mr Ripley’s contrary construction would entirely undermine the purpose of Regulation 168.
Conclusion Of The Upper Tribunal On The Record Keeping
The Tribunal said it was the record-keeping that culminated in denial of the relief sought:
The requirement for a single account is to provide an easily verifiable audit trail for HMRC, including identifying the date when consideration is written off. Such a condition plainly falls within the margin of discretion afforded to Member States. The requirements of regulation 168 contribute to ensuring the correct collection of VAT, preventing evasion and eliminating the risk of loss of tax revenue. They are not unduly onerous. Regency did not make out any case that the requirements made it impossible or excessively difficult to claim relief. In any event, the requirements are subject to the discretion of HMRC to allow less information to be contained in the single account. As mentioned above, there has been no challenge to HMRC’s exercise of discretion. Further, we do not accept that the FTT made any finding at [117] that Regency had kept a record of all the information required by regulation 168(2). In the light of what the FTT said at [119], the FTT simply assumed that to be the case in favour of Regency in circumstances where there was in any event a breach of regulation 168(3). The FTT found and Mr Ripley confirmed that receipts from customers could be allocated to specific invoices in the CSL. As such, the fact that Regency did not keep a single refunds for bad debts account was simply a matter of administrative convenience for Regency. Regency is not being penalised for its business model, as suggested by Mr Ripley. It has been denied relief because of deficiencies in its record keeping.
Court Of Appeal
Regency Factors PLC then appealed to the Court of Appeal and the case citation was Regency Factors Plc v HM Revenue & Customs [2022] EWCA Civ 103. They lost the appeal:
Regency’s accounting system maintains a running account for each client containing “an admixture of funds” which makes it “impossible to apportion credits to particular invoices submitted by a client and receipts from their customer.” Instead, the claim for bad debt relief was made on what Regency described as a “pari passu” basis. There is, in my judgment, no foundation for such a claim in the legislation. So on the facts of this particular case the keeping of a single bad debt relief account would undoubtedly have served a legitimate and useful purpose, namely that of ensuring that the particular supply which qualified for bad debt relief was properly identified; and in consequence that the correct amount of VAT was collected.
There was some debate about whether Regency either had established, or was now entitled to establish, that the substantive conditions for bad debt relief were satisfied, despite its failure to comply with regulation 168 (3). This boiled down to the correct reading of three paragraphs of the decision of the FTT. What the FTT said in those paragraphs was this:
“[117] Regulation 169 requires a company which claims BDR to keep certain records as set out in regulation 168(2). The appellant says it does so, and I have no reason to doubt that it keeps the records as listed. But s 168(3) requires them to be kept “in a single account”, to be known as “the refunds for bad debts account”. It is in this single account that the writing off must be recorded. But the appellant says it does not have a single account. It has a “Bad Debts Write Off Account” which Mr Farrell refers to in his second witness statement. In my view the record keeping by the appellant is insufficient to comply with regulation 168 and particularly paragraph (3). The purpose of having a single refunds for bad debts account in which write offs are shown is to establish an audit trail that HMRC investigators can easily check.
[118] This failure to keep a single account for bad debt refunds is possibly a consequence of the way the appellant accounts for its business. A passage at [39] of Mr Farrell’s first witness statement is particularly telling:
“As set out above the Current Account is a running account balance accordingly there is an admixture of funds and it is impossible to apportion credits to particular invoices submitted by a client and receipts from their Customer…”
[119] And in that same witness statement where Mr Farrell gives information about particular clients in relation to whom the appellant has claimed BDR he says that the claims made to BDR are not the amounts shown on his analyses (as in §15): they may be higher or lower. HMRC had already pointed these discrepancies out. Thus in the absence of a refunds for bad debt account as required by regulation 168 it is impossible to say whether the necessary conditions for BDR have been met.” (Emphasis added)
Mr Ripley naturally fastened on the first of the italicised passages; and Ms Lambert on the second. The UT said of paragraph [117] of the FTT’s decision that it was not a finding of fact by the FTT: merely an assumption in Regency’s favour. I did not understand Mr Ripley to dissent from that. But reading those paragraphs as a whole, what they mean in my view is that even on the assumption that Regency maintained the records required by regulation 168 (2), it was impossible to say whether the substantive conditions for bad debt relief had been met. That is a finding of fact by the FTT. That finding of fact does not appear to have been challenged in the UT, although Mr Ripley told the UT on instructions (but without any evidence to that effect) that it was possible to match payments from customers to specific invoices. Whether Regency had in fact carried out that exercise remains a mystery.
In short, Regency had the opportunity to prove its claim for bad debt relief in the FTT (just as SCT allows) but it failed to do so. It is not entitled to a second opportunity.
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