Customer insolvency and VAT – make sure your contract terms protect you.
April 17th, 2009 by GilesWhenever there is a business turn-down, the risk of insolvency increases – and an insolvent customer increases the risks for those who deal with him.
In a recent case involving the Ford Motor Company, a question arose concerning VAT on goods that were not paid for. Ford supplied cars to a dealer and issued an invoice for the cars and the VAT. Under Ford’s contract with the dealer, Ford had the right to re-possess the cars if they weren’t paid for and so, when the dealer got into financial difficulty and had an administrative receiver appointed, Ford took back the cars. Ford also issued a credit note to the dealer for the VAT and then claimed a refund of the VAT from HMRC.
The administrative receivers of the dealer also got involved on the VAT issue and the case went to the Court of Appeal. The Court said that it was not up to Ford to unilaterally issue a credit note: a supply (of the cars) had taken place and the liability to pay the VAT would only be cancelled if the terms agreed between Ford and the dealer provided for the contract to be cancelled if Ford repossessed the cars.
Lawyers are now advising companies to have a suitable cancellation clause in their contracts, otherwise they might still have to pay VAT on goods in circumstances similar to that in the Ford case.
ContractStore is pleased to say that our Conditions of Sale already have a cancellation clause of the type recommended by the Court of Appeal.
The moral is: protect your business – use a ContractStore contract.