Regency Factor Plc v The Commissioners for HMRC

For VAT bad-debt relief, consideration is received only when it is actually available to the supplier. A contractual entitlement to fees, or their deduction when a finance provider makes an advance, does not itself amount to payment. The entitlement arises only when recoveries from debtors produce funds which the provider can retain or set off.

Relief must nevertheless be established for each individual supply. A claimant must comply with the requirement in regulation 168 of the Value Added Tax Regulations 1995 to keep the prescribed information in one refunds-for-bad-debts account. Separate records do not meet that requirement. The condition provides a proportionate and verifiable audit trail.

Regency Factors Plc provided recourse factoring services. It advanced funding to clients against assigned invoice debts, collected those debts from customers, and charged factoring fees, refactoring charges and disbursements. It claimed VAT bad-debt relief where it considered fees unpaid.

The First-tier Tribunal dismissed its appeal against HMRC assessments withdrawing the relief. It held that the fees had been paid by set-off when Regency made the initial advances. It also held that Regency had not kept the required single refunds-for-bad-debts account.

On appeal, the central issues were when consideration for the factoring services was received for the purposes of Article 90 of the Principal VAT Directive and section 36 of the Value Added Tax Act 1994, and whether Regency complied with regulation 168 of the Value Added Tax Regulations 1995.

1. Appeal dismissed. The Upper Tribunal held that the First-tier Tribunal was wrong to conclude that Regency received consideration when it made an initial advance to a client. An advance was a financing arrangement. Deducting fees from the amount advanced gave Regency a contractual entitlement to set off, but did not put the consideration at its freely available disposal.

2. Consideration for the factoring services was received when Regency recovered the underlying debt and retained or set off its charges against sums otherwise due to the client. The same analysis applied to refactoring charges, disbursements, and fees charged where no initial advance had been made. A running client account could not alter the statutory position. Bad-debt relief operates by reference to each supply, and receipts could be matched or attributed to individual supplies.

3. Regency nevertheless failed on Ground 4. Regulation 168 required the prescribed information to be kept in a single account called the refunds-for-bad-debts account. Regency accepted that its information was held in separate records rather than in such an account. The requirement was not confined to records originally created for the purpose of the regulation.

4. The single-account requirement was a proportionate condition for relief. It enabled HMRC to verify the audit trail, including the date of write-off, and fell within the Member State's permitted discretion under Articles 90 and 273 of the Principal VAT Directive. Regency had not challenged HMRC's discretionary powers under regulation 171(3). Its non-compliance with regulation 168(3) therefore defeated the claims.

• Upper Tribunal (Tax and Chancery Chamber): appeal dismissed: Regency Factor Plc v The Commissioners for HMRC [2020] UKUT 357 (TCC).
• First-tier Tribunal (Tax Chamber): dismissed Regency's appeal against HMRC assessments withdrawing claimed VAT bad-debt relief; decision released on 28 February 2019.