If you use the Cash Accounting scheme to calculate any VAT due to HMRC you are automatically protected from the VAT effects of bad debts – you will only be paying over output tax received from customers less input on bills paid to suppliers.
If you are not using Cash Accounting or other special schemes that allow you to pay on a receipts basis, then potentially you can be out of pocket. Your remedy is Bad Debt relief.
The VAT bad debt relief rules seek to deal with the issues that can arise when an invoice has been issued to a customer and no payment has been received after a significant period of time has elapsed. The relief allows businesses to reclaim the VAT paid to HMRC.
There are a number of conditions which must be met in order to claim bad debt relief. The following conditions apply:
- Businesses must have already accounted for the VAT on their supplies and paid it to HMRC.
- Businesses must have written off the debt in their day to day VAT accounts and transferred it to a separate bad debt account.
- The value of the supply must not be more than the customary selling price.
- The debt must not have been paid, sold or factored under a valid legal assignment.
- The debt must have remained unpaid for a period of six months (but not more than 3 years and 6 months) after the later of the time payment was due and payable or the date of the supply.
The procedure for claiming bad debt relief is quite straightforward under normal circumstances. Once all of the conditions have been met the VAT claim is made by including the amount of the refund in Box 4 of the VAT return for the period in which the debt became over six months old.
If you would like any further assistance or advice regarding this or any other VAT issue please call.
Lesley Malkin
Audit Partner
