In J & B Hopkins Ltd v HMRC [2017] TC05874 and J & B Hopkins Ltd [2018] UKUT 0382 a taxpayer could not avoid paying HMRC the VAT assessment merely because it could no longer charge the VAT to its insolvent customer.
- Hopkins had a construction contract with Rok Building Ltd.
- Rok were building a new place of worship for a charity, a zero rated supply.
- Hopkins were provided with a copy of the certificate given to Rok by the charity confirming the building would be used for a charitable purpose.
- Hopkins zero rated its supplies to Rok.
- Rok went into administration and was liquidated.
- Hopkins took over as main contractor and continued to zero rate supplies, now directly to the charity.
After a compliance visit HMRC assessed Hopkins for VAT and penalties:
- Hopkins should have charged VAT on the supply to Rok
- Only the supplier to the charity could zero rate its supply, i.e. only Rok until Hopkins were the main contractor.
Hopkins appealed against the assessment on the basis that HMRC would be unjustly enriched at Hopkins expense:
- Hopkins would not be able to recover the additional 20% from Rok as they had been liquidated.
- HMRC would receive all of the VAT from Hopkins but would not have to refund this to Rok as they were liquidated.
- The assessment should be cancelled as, if VAT had been charged correctly, Rok would have been entitled to recover it and there would have been no VAT loss.
The FTT dismissed Hopkins appeal and found that HMRC had not received a windfall and had not been unjustly enriched:
- Hopkins should have got its correct invoice submitted to the customer sooner.
- Hopkins has received a payment, albeit not the full payment.
- The amount outstanding is a bad debt for Hopkins.
- Under the VAT bad debt relief rules, the part-payment included a proportion of the VAT due.
- 4/5ths of the VAT is deemed to have been paid along with 4/5ths of the net.
- 1/5th of the VAT could be claimed as bad debt relief, so there is no loss of VAT to Hopkins.
Economically speaking, Hopkins have suffered the loss of 4/5ths of the VAT, though under VAT law, they have suffered the loss of 1/5th of the net amount only, as 4/5ths of the VAT has been received and 1/5th is subject to a bad debt relief claim.
Effectively, this case means that when a supplier has erroneously charged no VAT to a customer, it will not be able to avoid paying that VAT to HMRC, even if it is unable to recover that VAT later from the customer. Whether the supplier has received part-payment or no payment, bad debt relief will ensure that the appropriate amount of VAT is recoverable.
Appeal to the Upper Tribunal
The company failed to over turn the decision on appeal, see J & B Hopkins Ltd [2018] UKUT 0382
Links
VAT: Land & Property at a glance
VAT reclaims and unjust enrichment
External link: J & B Hopkins Ltd v HMRC [2017] TC05874 and J & B Hopkins Ltd [2018] UKUT 0382
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