Treatment of employee theft as a ‘bad debt relief’ claim

A dishonest employee of the taxpayer took orders for goods over the telephone from customers but arranged for debit card payments to be paid into his personal bank account rather than the taxpayer’s account.

The company accounted for output tax because sales had been made but when the directors learned about the employee’s dishonesty they claimed bad debt relief on a subsequent VAT return. The case report ran only to four pages with no indication as to the amount of tax at stake but it did not seem that the employee repaid the money or although the police were involved that any prosecution was made.

HMRC’s view was that no bad debt relief was due because the customer had paid for the goods. It said the dishonesty was the same as if the employee had stolen cash from the till so output tax was...