Finance Bill 2002: EXPLANATORY NOTE
CLAUSE 22: VAT: DISALLOWANCE OF INPUT TAX WHERE CONSIDERATION NOT PAID
SUMMARY
1. Clause 22 provides that businesses which have not paid for supplies within a certain period shall be required to repay VAT claimed as input tax on those supplies. It removes the current connection between the requirement for the debtor business to repay input tax and the making of a claim for bad debt relief by the supplier. The changes will have effect in relation to supplies made on or after such day as the Commissioners may appoint by order made by statutory instrument.
DETAILS OF THE CLAUSE
2. Subsection (1) of the clause introduces Section 26A to the VAT Act 1994.
3. Subsection (1) of s26A provides that a person shall not be entitled to credit for input tax where some or all of the consideration for the supply has not been paid within 6 months of the relevant date.
4. Subsection (2) of s26A defines ?the relevant date? as the date of the supply or, if later, the date on which the consideration for the supply became payable.
5. Subsection (3) of s26A allows the Commissioners to make supplementary, incidental, consequential or transitional provisions by regulation for the purposes of s26A.
6. Subsection (4) of s26A allows the Commissioners, by regulation, to specifically
(a) provide for an entitlement to credit for input tax to be restored where payments are made after the relevant date,
(b) make rules for ascertaining whether anything paid is taken as paid by way of consideration for a particular supply; and
(c) make rules for particular cases.
7. Subsection (5) of s26A allows the Commissioners, by regulation, to make different provision for different circumstances.
8. Subsection (6) of s26A defines the time of supply for the purposes of this section.
9. Subsection (2) of the clause removes part of the current provisions for bad debt relief in Section 36 of the VAT 1994. Section 36 (4A) currently provides that the recipient of a supply shall be taken not to be entitled to credit for input tax on that supply where a valid bad debt relief claim has been made by the supplier. Section 36 (5)(ea) provides that regulations may be made restoring a person's entitlement to credit for input tax where the supplier repays to the Commissioners the amount claimed as bad debt relief. Section 36(4A) and 36 (5)(ea) (together with Section 39 (2) to (4) of the Finance Act 1997, which inserted these sections into the VAT Act 1994) are repealed by Schedule 39 Part 2. These repeals have effect in relation to supplies made on or after such day as the Commissioners may appoint by order made by statutory instrument.
10. Subsection (3) of the clause provides that the changes will take effect in relation to supplies made on or after such day as the Commissioners may appoint by order made by statutory instrument.
BACKGROUND
11. Bad debt relief allows businesses that have made supplies on which they have accounted for and paid VAT, but for which they have not received payment, to claim a refund of the VAT by reference to the outstanding amount.
12. Currently, a business making a claim for bad debt relief is required to notify the debtor within 7 days that it has made a claim which, in turn, means that the debtor must repay VAT it has claimed on those supplies.
13. The changes set out above and associated amendments to the VAT Regulations 1995 will remove this requirement from the supplier. The recipient will now be required to adjust their credit for input tax solely based upon not making payment by the time at which bad debt relief is claimable by the supplier.
14. This change is being made in response to representations from businesses that the current arrangements are unnecessarily difficult, costly and time consuming.
15. The new arrangements apply from a date to be announced following Royal Assent.