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VAT, Employee thefts and Bad Debts

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By Dave Watkinson

HM Revenue & Customs do not always get things right, there have been a couple of tribunal decisions that have gone against them in the last few weeks, one of which concerned the IR35 legislation.

Introduced 19 years ago to “counter” perceived tax avoidance through the use of limited companies one would expect HMRC to know these rules by now, but they are still trying to push the boundaries further. Their continued failure to win at Tribunal does not do much to create faith in their “Employment Status Tool” which has been much criticised for ignoring certain very fundamental badges of self-employment.

However, that is for another day. Today I want to look at a case involving VAT, Employee thefts and Bad Debts. The facts of the case are very simple. The company, Total Catering Equipment Ltd, sold goods over the internet and, quite rightly, charged VAT on those sales and paid it to HMRC on their quarterly return. However, when taking the order and receiving payment by debit card one of their telephone operatives gave their own personal bank details to the customer rather than the company’s.

The company, therefore, never received payment for the goods and, eventually, wrote the debt off and claimed VAT relief on the bad debts. However, HMRC claimed that this treatment was incorrect and that the loss was a result of theft. Whilst this distinction may seem trivial it is of vital importance when looking at the VAT treatment. If a business incurs a bad debt then it can deduct the VAT originally charged from the amount due to HMRC. However, there is no similar relief in respect of theft losses, increasing the cost of those losses to the business by 20%.

You would think that in this case HMRC had a reasonable point. How can the business suffer a bad debt when the customer has paid, even if it was innocently (on their part) to the wrong bank account. Surely this is theft of those monies by the employee from their employer. HMRC thought so, arguing that it was the same as the company receiving the money in cash which was then stolen by the employee.

The Tribunal says “No” but I will leave it up to you to interpret this if a similar problem arises in your own case. The Tribunal found for the company on the grounds that the employee had made a “dishonest frolic on his own” and had not acted “within the scope of his employment”. Therefore, the claim for relief was valid. All I can say at this point is that if you as an employer have a similar case then hope that you get the same judge!

WatkinsonBlack have considerable experience in all areas of taxation and businesses services, including providing a very cost-effective payroll bureau service. If you want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us. Please note that these ideas are intended to inform rather than advise and you should always obtain professional advice before taking any action.

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