Dispute over bad debt

A firm of Edinburgh solicitors provided services in relation to insurance claims. Where the policyholder was VAT-registered the business would charge its fees to the insurer and the VAT on those fees to the policyholder who could reclaim the VAT as input tax.

For the years from 1985 to 2007 the legal firm claimed VAT bad debt-relief in cases where the policyholder failed to pay claiming the full relief on the invoices that showed a 'VAT only' amount.

In 2007 HMRC decided the taxpayer's method of claiming bad debt relief was incorrect and should be limited to 7/47 of the amount claimed: restricted to the VAT element.

The taxpayer appealed.

The First-tier Tribunal agreed with HMRC and the business appealed again.

The Upper Tribunal said the purpose of VATA 1994 s 36 (bad debt relief) was to...