COVID-19 - Interaction between VAT bad debt relief, payments on account and the COVID VAT deferral

The CIOT wrote to HMRC in respect of the correct accounting for bad debt relief for VAT payments on account businesses, where they had both part paid and part deferred the total VAT due in a VAT quarter during the VAT return deferral period of 20 March to 30 June 2020. 

HMRC confirmed:  

VAT payments on account are advance payments due from certain notified businesses who submit quarterly VAT returns. The payments on account are due on the last working day of the second and third months of every VAT quarter and the balancing payment is due with the VAT return for that period. 

The two interim payments on account in any VAT quarter are based on the business’s annual VAT liability and are not directly based on actual supplies made in the VAT period for which they are made. The balancing payment due when the return is submitted is directly based on the actual liability for that VAT quarter.

If a supplier does not pay HMRC in full for any given VAT quarter, because it has not paid one or more of the two interim payments on account and/or the balancing amount due, it will not have paid all the VAT due for that period.  The reason for not paying in full could be the VAT Deferral Scheme, or some other reason. Either way, where a supplier has a bad debt that is more than 6 months old, they will be able to claim Bad Debt Relief once they have paid the VAT due on the unpaid supply to HMRC (s36(1)(a) VATA 1994 and regulation 167(b) of the VAT Regs 1995).   

The bad debt relief provisions within the VAT Regulations 1995 do not expressly address the scenario of part-payments.  A supplier seeking relief should look back at the VAT quarter in which the supplies to which the claim relates occurred and claim to the extent the VAT on the unpaid supplies has been paid to HMRC.  As payments to HMRC do not relate to individual supplies but the total value of VAT due on all their supplies, they should apportion any VAT paid across all supplies made in the period and claim the proportion of VAT that is applicable to the unpaid supplies.  A supplier cannot choose which supplies part-payments made to HMRC were for.  Thus, if a supplier paid “X”% of the tax due for the VAT period when it made the supplies, it can claim that same % of the VAT on bad debts subsequently arising from the supplies it made in that VAT quarter.