If your customer doesn't pay up, you can claim the unpaid VAT from HMRC as bad debt relief (BDR) . What must you get right to ensure you get maximum relief?
When can you claim? You can claim BDR for VAT you have charged your customers if it remains unpaid six months after the due date. You must make the claim within 4 1/2 years of issuing the invoice.
How do you claim? You will need to keep a "bad debts" account within your book-keeping system. You make the claim by adding the refund to the input tax claimed in Box 4 of the VAT return.
You do not reduce the output tax due in Box 1.
Tip Although the debt has been written off in the BDR account, this is only for VAT purposes. You can still continue to pursue the debt in full.
How much can you claim? You can claim the output tax originally charged. It's irrelevant if the VAT rate has subsequently changed. Similarly, you pay VAT at the original rate, not the rate applicable when payment is received.
If your customer has made payments on account, you can only claim for the VAT included in the outstanding balance.
The amount of bad debt relief is normally the VAT fraction of the outstanding amount. However, the Upper Tribunal has held that in very limited circumstances relief may be given for the entire unpaid sum.
The appellant was a firm of solicitors. It supplied services in connection with insurance claims. In compliance with an agreement between HMRC and the insurance industry, it issued VAT-only invoices to VAT-registered insured parties (the main charge being invoiced to the insurer). The Upper Tribunal decided that any amount of such VAT-only invoices which remained unpaid after six months was available in full for bad debt relief. (Simpson and Marwick v HMRC [2011] UKUT 498 (TCC)) - viewable here .
Many salon owners overhearing golf club gossip think if they rent a chair to an operative the rental is exempt from VAT. This is NOT so, but some VAT savings can be obtained. How?
Chair rental Basically the idea is to make your operatives self-employed and then rent them a chair in your establishment. Rents are exempt from VAT and - hey presto! - there's no VAT to pay on the rental income. The proprietor's taxable turnover falls below the de-registration threshold (currently £73,000) so they can de-register and save on their own salon earnings as well. Sounds too good to be true.
WARNING It is! This scheme is two decades out of date. The reality is the operatives are paying for a range of services they use in the establishment all of which are standard-rated. The bad news is that you have to account for output tax on the income from your operatives.
The nature of this supply has given rise to numerous tribunal decisions culminating in a set of guidelines issued as long ago as 1992 between Customs and Excise (as it was then called) and the National Hairdressers' Federation which treats this as a standard-rated supply to carry on business in the establishment, including use of the chair and access to other facilities rather than an exempt licence to occupy.
Perm solution In a February 2011 case (Glen-Jones t/a Sophisticuts which can be read here) Mrs Glen-Jones argued that chair rental supplies made to independent operatives were exempt supplies of a licence to occupy land.
HMRC countered by arguing it was a supply of hairdresser's facilities taxable at the standard rate.
The First Tier Tribunal found the supply to be essentially a taxable supply of hairdressing services and the non-exclusive right of an operative to occupy the basement was merely a minor element of that supply.
Are the operatives self-employed? In a recent case the First Tier Tribunal commented that had the tenancy agreement been correctly drafted, it could have seen two supplies - a licence to occupy land and a supply of supporting services. VAT exemption would have applied to the licence to occupy land if the plan attached to the agreement had clearly identified the occupied area AND the references to the ancillary services had formed part of a separate VATable service contract.
TIP Separate the licence to occupy land from from the supply of any other services. Draw up proper legal documents identifying the area each operative occupies on a plan. Have a fixed rent, not one based on a share of each operative's takings.
