Rent conundrum

Purpose of credit note to liquidated company

The taxpayer owned a property which was let to a company connected to and controlled by him. He opted to tax the property and charged and accounted for VAT on the rent. In February 2011 an administrator was appointed to the company and in April 2012 a liquidator was appointed because the company was insolvent. Initially the liquidator said the £1.4m was preferentially paid by the company to the taxpayer. A settlement was reached in February 2015 under which the taxpayer paid £300 000 to the liquidator and issued a credit note of £300 000 for rent to the company.

The taxpayer claimed the VAT on the credit note. HMRC refused. He then claimed bad debt relief for the VAT which HMRC also refused. The taxpayer appealed. He said the credit note discharged the company’s liability to pay the rent. If the...