EU law – VAT bad debt relief for solicitors: Simpson & Marwick WS v HMRC

5 December 2011

In 1985 the Commissioners of Customs and Excise directed that a solicitor who acts on the instructions of an insurer for an insured policyholder who is registered for VAT should issue duplicate invoices, with a view to recovering their fees and outlays from the insurer, but the VAT thereon from the insured. The appellant taxpayers, a firm of solicitors, issued feenotes in accordance with this direction. In circumstances where the insured policyholder did not pay the VAT invoice, the firm claimed bad debt relief in the whole amount of the VAT invoice.  In 2007 HMRC challenged this practice, contending that the bad debt relief was limited to a proportion of the amount of the VAT invoice. The First Tier Tribunal held that the position taken by HMRC was correct. The Upper Tribunal (Tax and Chancery Chamber) has upheld the solicitors’ appeal. Lord Drummond Young held: (i) that on a proper construction of section 36 of the VAT Act 1994, bad debt relief was available in these circumstances on the whole amount of the VAT invoices; and (ii) that this construction of the Act was strongly supported by a proper understanding of the principles of VAT under the relevant Directives as explained by the European Court of Justice. He rejected a separate argument advanced by the appellant taxpayers based on Article 1 of the First Protocol to the European Convention on Human Rights.

W. James Wolffe QC of Axiom Advocates represented the successful taxpayers before the Upper Tribunal.