H.M. TREASURY Notes on Clauses

CLAUSE 12: VALUE ADDED TAX (ASSIGNMENT OF DEBTS)

INTRODUCTION

1. This clause concerns circumstances where a debt for a supply has been assigned ie transferred to a third party. To prevent potential avoidance, it expressly provides for the rules of the bad debt relief scheme to take into account payments received by someone to whom a debt had been assigned. The clause extends Customs' powers to require businesses to furnish information and produce documents to include an assignee of a debt. The main provisions apply to payments received after 9 March 1999.

DETAILS OF THE CLAUSE

2. Subsection (1) substitutes a new subsection (3) in section 36 of the Value Added Tax Act 1994. Section 36 sets out the main rules of the bad debt relief scheme under which someone who has supplied goods or services, and accounted for VAT, may claim a refund of VAT in proportion to the amount remaining unpaid for the supply. Subsection (3) of section 36 defines the "outstanding amount" which is the amount on which bad debt relief may be claimed.

3. The new subsection (3) expressly requires the "outstanding amount" to be reduced by payments received, prior to submission of the claim, not only by the supplier, but also by someone to whom the debt had been assigned. It applies to refunds made after 9 March 1999, in respect of payments received after that date. It came into effect from 9 March 1999 under the Provisional Collection of Taxes Act 1968.

4. Subsection (2) amends subsection (5)(e) of section 36 which permits the making of regulations requiring the repayment of bad debt relief when payments are received after a refund has been made. It extends the possible scope of such regulations to specifically include circumstances where payments are received by an assignee. This amendment applies from Royal Assent.

Subsection (3) amends paragraph 7 of Schedule 11 to the Value Added Tax Act 1994, by inserting a new subsection (9). As a result, it is clear that a person to whom a debt for a supply of goods or services is assigned is required to provide to Customs, on request, information and documents relating to that supply. This provision comes into effect from Royal Assent.

6. Subsection (4) requires the regulations relating to bad debt relief (Part XIX of the Value Added Tax Regulations 1995), except for regulation 171, to be read so that receipt of payment by an assignee has the same effect as receipt of such payment by the supplier. This ensures that in the regulations covering the detailed operation of the scheme, it is clear that payments to assignees must be taken into account when claiming bad debt relief. This complements subsection (1), and came into effect from 9 March 1999 under the Provisional Collection of Taxes Act 1968.

7. Regulation 171 is excluded from this provision, so that claimants will not be required to repay bad debt relief in respect of payments received by assignees after a refund has been claimed.

8. Subsection (5) ensures that subsections (1) and (4) cannot have retrospective effect, by limiting their application to payments received, and bad debt relief refunds and repayments made, after 9 March 1999.

BACKGROUND

9. The rules of the bad debt relief scheme did not expressly cover payments received by someone to whom the debt has been assigned. It was clear that payments received by a supplier before claiming bad debt relief had to be taken into account when calculating a refund, but not payments to an assignee. This clause addresses that situation.

10. Bad debt relief is not normally allowable on a debt which has been assigned unless and until it is assigned back to the supplier. Although claimants generally limit their claims to the VAT element of the amount of debt assigned back to them, and therefore take into account payments received by the assignee, the law did not expressly require them to do so. There was therefore a possibility that a business could claim bad relief even though the customer had paid (an assignee) for the supply. This measure combats the risk of avoidance in this situation.

11. Similarly, it was not clear that the rules of the scheme could require repayment of bad debt relief following receipt of payment by an assignee, after the refund had been paid. Subsection (2) enables regulations to that effect to be made. As a result, if it becomes necessary, for example because of deliberate avoidance or abuse, it will be possible to tackle the avoidance quickly by making such regulations.

12. Customs can require businesses to provide information and documents relating to supplies from those concerned with the supply. However, it was not clear whether this requirement extended to assignees. This clause makes it clear that, if necessary, Customs can obtain information about payments received by assignees, to ensure that suppliers account for VAT/bad debt relief correctly.