VAT bad debt relief

Tax Comments Off on VAT bad debt relief

Under the normal VAT accounting rules a business supplying goods or services usually accounts for VAT at the time an invoice is raised irrespective of whether payment has been received or not. There are exceptions, if for example, a business uses the cash accounting scheme.

If you have paid the VAT on a sales invoice and subsequently, you are unable to collect payment, you can claim bad debt relief and recover the VAT output tax you have already paid to HMRC.

The conditions that apply before you can claim the relief are:

  • 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.

Businesses must also have a separate bad debt account showing:

  • The amount written off as a bad debt.
  • The VAT on which they have claimed bad debt relief.
  • The VAT period in which they have claimed relief.
  • The total amount of VAT charged on each sale.
  • The VAT period in which the VAT was originally paid.
  • Any payments received (shown separately for each invoice).
  • The name of the customer(s).
  • The invoice date and number – or similar information – to which the debt relates.

The records must be held for four years from the date of the bad debt relief claim.

If you would like any further information please call for details.

Lesley Malkin, Audit Partner