Regency Factors Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 28 February 2019 |
| Neutral Citation | [2019] UKFTT 144 (TC) |
| Date | 28 February 2019 |
| Court | First-tier Tribunal (Tax Chamber) |
[2019] UKFTT 0144 (TC)
Judge Richard Thomas
Nigel Gibbon of Nigel Gibbon & Co appeared for the appellant
Mrs Ann Sinclair, litigator, HM Revenue and Customs, appeared for the respondents
Value added tax – Bad debt relief (BDR) – When consideration for supply of services received – When consideration due and payable – Whether amounts outstanding more than six months after time of supply – Whether claims for BDR in time – Whether procedural requirements for BDR met including maintenance of refund of bad debts account and writing off debts to that account – Appeal dismissed.
The FTT considered whether a debt factoring company had made proper claims for bad debt relief.
Regency Factors is a debt factoring company. Under the arrangements considered by the FTT when a client transferred their debts (also referred to as “receivables”) to Regency the client received an advance. When Regency collected the debts additional sums were paid to the client.
During a VAT inspection visit HMRC noted that Regency had made a number of BDR claims. The fees charged by Regency to its clients are subject to VAT. Regency calculated its entitlement to BDR based upon the month end outstanding ledger balances for its clients. However, HMRC contended that there were no bad debts on which to claim BDR because Regency received its fees up front from the clients. HMRC's view was that when a client assigned their debts to Regency the advance they were paid was reduced by the amount of Regency's fee.
The question of whether there were bad debts on which to claim relief related to the tax point for Regency's supplies. HMRC's supplementary argument, in case it lost on this point, was that the company had not fulfilled the record keeping requirements to make a BDR claim, in particular it had not maintained a refund of bad debts account as required by SI 1995/2518, reg. 168.
The FTT analysed Regency's contracts and concluded that HMRC's view was correct. Regency had been paid for its services because the amount of the advance to which the clients were contractually entitled was reduced by its fee. As the fees had been paid there were no bad debts. The FTT further found that the record keeping requirements for the relief had not been met.
Regency's contracts with its clients and its record keeping processes were not straight forward to explain. The FTT noted that the finance director's witness statement contained “numerous inconsistencies of terminology and a lot of jargon” (para. 19). In addition, it is also the case that HMRC were, when their investigation started, provided with the wrong contract. This case demonstrates the importance of providing both HMRC and the Tribunal with clear, consistent information which has been prepared with attention to detail. Had the appellant maintained clearer records it might have realised that its claim was unlikely to succeed.
[1] This was an appeal by Regency Factors Ltd (“the appellant”) against VAT assessments withdrawing bad debt relief included in its returns. The appellant in the course of its business described in more detail below makes only one type of supply on which VAT is chargeable, the supply of factoring services to its clients. It issues a VAT invoice for these services when a client assigns invoices of its own to the appellant which it wished the factor to collect and accounts for the VAT to HMRC on the basis that the time of supply is the issue of the invoice. An important issue in this case is whether it also receives payment of the consideration at the time of the issue of the invoice.
[2] I had a ring binder of documents containing correspondence between the parties. I also had two witness statements from Mr John Farrell, Group Chief Executive of the appellant, to which were appended two further ring binders of documents. I have no hesitation in accepting Mr Farrell's evidence as truthful and credible, but as is often the case with witnesses so close to the issues there were opinions expressed in the statement relating to the matters which it is the Tribunal's function to decide on and I have ignored those opinions.
[3] I also had a witness statement from Ms Tara Munir, a Senior Officer in HMRC's Wealthy/Mid-sized Business Compliance section and who described the HMRC compliance check and exhibited the correspondence. I also accept Ms Munir's evidence which was not in dispute.
[4] So far as the method of operation of the appellant and the basis for its accounting procedures is concerned I draw the following account from Mr Farrell's witness statement and his oral evidence.
[5] The appellant was formed in October 1991 and was registered for VAT. It acts both as holding company for the group and as a trading company.
[6] The appellant's business is factoring invoices of, and providing funding or finance to, its clients (who are also called in contracts its “suppliers”). The factoring service is “with recourse” which means that the appellant is entitled to require the client to “repurchase” (Mr Farrell's word) the debt from the appellant should the appellant's efforts to collect the debt fail.
[7] The basic factoring service provided involves the client “selling” (Mr Farrell's word) invoices issued by it to customers to the appellant. The appellant then takes over the collection of the debt due from the client's customers, including recovery action. The customer is aware of the appellant's role as the invoice bears a notice of assignment to the appellant.
[8] Mr Farrell explained the mechanics of the factoring and funding services by way of a chronology of a typical with recourse factoring agreement:
- The client enters into the agreement
- The client submits schedule of invoices to the appellant with a view to obtaining funding.
- The invoices are stamped with a notice of assignment and certain items are selected for verification.
- The appellant makes an advance (Mr Farrell puts the words a loan in brackets after advance) against the value of the invoices less [the appellant's] charges.
- In the normal course of its business the appellant collects the invoice value from the customer on the due date.
- When a debt is outstanding the appellant carries out its credit control procedures.
- When the debt is collected, the balancing sum, ie the invoice value received, less the initial purchase percentage is repaid to the client.
[9] Mr Farrell also explained the accounting system used by the appellant to record the events at each stage. There are in effect two separate and distinct ledgers maintained by the appellant, the Overall Sales Ledger (“OSL” – my abbreviation) which reflects the client's business with its customers and the Factoring Current Account (“FCA”) which reflect the appellant's account with the client. Both the OSL and the FCA are shown on the same client financial screen in the appellant's computerised accounting system, which they call an F15.
[10] In addition they maintain a Customer Sales Ledger (“CSL”) for each customer of each client. But the FCA shows the cumulative position for all customers of the same client.
[11] From Mr Farrell's detailed account of the way the FCA works, illustrated by him with reference to a printout of sample F15s and to a simple example which assumes no other transactions, I find (after making some inferences where his description is unclear or inconsistent) the following facts.
- Every time a client submits a batch of invoices the OSL amount increases and each CSL increases.
- Such an increase also increases the amount available of funding.
- Once the information from the invoices had been input and the invoices themselves scanned and selected invoices verified with the customer, the system applies charges to the FCA. In Mr Farrell's example the charge is 3% of invoice value.
- The charges are shown under the heading Commissions/fees and because they are VATable the applicable VAT at the standard rate is added under the heading VAT.
- The available funding is calculated. Typically the system calculates it as 80% of the approved debt (some debt eg old debts may not be approved as backing funding and there may be overall limits) less the charges including VAT. Thus on the example of one invoice for £1,000 acquired, the available funds are calculated as £1,000 × 80% − £36 (3% of £1,000 plus 20% VAT) ie £764.
- If the client wished to drawdown this facility they will receive an advance of £764 and the FCA will be debited.
- The appellant then carries out its normal collection procedures including calling the customers, issuing dunning letters and sending statements.
- The final step in the normal collection procedure is to allocate the funds collected. They are allocated on two separate ledgers. The first is CSL where the fund are allocated to the relevant invoice. The second is the OSL for the customer concerned. Where the £1,000 is collected, the OSL is reduced by £1,000 and the approved funded figure reduced by £800. The FCA with the customer would then stand at –£200 (£764 + £30 + £6 − £1,000) and the approved funds become £200. That amount represents the retention due to the client, £800 having been used to repay the £764 and the charges of £30 plus VAT. (Mr Farrell's statement uses the word repaid in respect of all the amounts).
[12] Mr Farrell adds, “for the avoidance of doubt” that what has happened is that the client has issued an invoice to its customer for £1,000 and has received two payments, £764 being the initial advance and £200 the “retention payment”. The difference between £1,000 and £964 is the charge for services plus VAT.
[13] In a further analysis of the FCA Mr Farrell says that:
it is clear however that within the [FCA] there is no allocation of funds against particular invoices. Instead when invoices are received (as part of a schedule) then an...
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