If you sell to a customer and account to Customs for the VAT on the sale but the customer fails to pay you, you can claim a refund of the VAT paid. Previously this required you to wait six months and in addition to write to your debtor customer advising that a claim for VAT bad debt relief had been made. For supplies made from 1 January 2003, relief can be claimed automatically after six months without having to write to your customer. This change is designed to make claiming the relief easier and removes any commercial barrier to claiming relief in circumstances where the late payer is a valued customer.
As a quid pro quo for this, where a customer has not paid a supplier within six months, VAT previously claimed as input tax must be repaid to Customs. Previously this only needed to be done following receipt of a notice from the supplier who was claiming bad debt relief. This change does mean that you will need to keep a careful check on any payments you make late and not rely on the supplier reminding you. Otherwise you may find Customs chasing you for recovery of input tax!
Marks and Spencer has had a long running dispute with Customs over VAT repayments going back to the introduction of the tax in 1973. Customs had argued that any repayment must be limited to three years by virtue of the ‘capping’ provision introduced in 1996. However, the European Court of Justice has decided that although the three year cap is lawful it should not have been introduced retrospectively. The consequence is that some businesses may now be entitled to further VAT repayments and Customs is inviting claims where:
In all cases the overpayments need to have been made before 4 December 1996.
All such claims, say Customs, must be made by 30 June 2003. Further details can be found in Business Briefs 22/02 and 27/02 which can be found at www.hmce.gov.uk