Claiming VAT bad debt relief

There are a number of conditions that a business must meet in order to be eligible for claiming bad debt relief.

To be eligible for claiming VAT on bad debts there are a number of conditions such as:

The debt must have remained unpaid for a period of at least 6 months after the later of: the time payment was due and payable and the date of supply, or the date of supply;
The business must have already paid the applicable VAT on the supplies to HMRC;
The amount needs to be written off as a bad debt in the businesses usual accounting system and transferred it to a separate VAT bad debt account;
The value of the supply must be no more than the usual selling price; and
The debt must not have been sold or factored by way of a valid legal assignment.

Bad debts can have a serious impact on cash flow because businesses are required to pay VAT to HMRC that they perhaps have not yet received from clients. VAT bad debt relief claims may still be able to provide additional assistance to businesses with their cash flow. The above should not stop businesses from continuing to chase the debt as per their normal credit control procedures, and not treat the debt as irrecoverable.

How to claim VAT bad debt relief

Businesses can claim VAT bad debt relief in box 4 of the VAT Return which covers the date when the business fulfilled the conditions to make a claim. The debts that a business can make a claim against are limited to debts arising from the last 4 years and 6 months of the later of:

when payment is due and payable; or,
the date of the supply.

A business can only claim VAT bad debt relief if it were the actual supplier of the goods or services. Where a business is transferred, the purchaser cannot claim bad debt relief on supplies made before the transfer because the purchaser did not make the supplies. From 1 May 1997 there is an exception to this rule where the purchaser also takes over the VAT registration of the seller In these circumstances the purchaser acquires the seller’s entitlement to bad debt relief on supplies made by the seller.

Later payment received

If a business claimed a refund under the VAT bad debt relief scheme and later receive a payment for the supplies, it must repay to HMRC the VAT element included in the payment. All payments received by the business for the supply or supplies must be shown in the businesses separate bad debt account. When you’re repaying all or part of your refund, put the amount you’re repaying in box 1 of your VAT Return for the period in which you received the payment.

Record keeping

When you claim a VAT bad debt relief refund you must keep:

a copy of the VAT invoices for the supplies on which you’re claiming a refund (if you did not issue a VAT invoice you must have a document showing the equivalent information)
a separate VAT bad debt relief account showing the:
(a) amount you have written off as a bad debt
(b) amount of VAT you wish to claim as bad debt relief
(c) VAT period in which you have claimed a refund
(d) total amount of VAT charged on each supply
(e) VAT period in which you originally accounted for VAT on the supply
(f) payment received for each supply
(g) name of your customer, and
(h) date and number of the invoice to which the bad debt relates (if you did not issue an invoice you must include sufficient information to allow the time and type of the supply to be readily identified)

Contact

For more information on making a VAT bad debt relief claim for VAT, please contact one of the VAT experts at Solve VAT on 0161 883 2120.

HMRC

HMRC notice 700/18 on how to reclaim VAT on bad debts.

VAT bad debt relief – how to claim