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VAT Bad Debt Relief

With the Bank of England predicting that the UK will fall into recession this year, businesses will increasingly find that their customers are struggling to pay them. Unfortunately, that will see an increase in bad debts.

Most larger businesses use the accruals basis for preparing their VAT returns, meaning they pay output VAT to HMRC based on the date of the sales invoice. However, this is bad for cashflow if the customer doesn’t pay on time or doesn’t pay at all.

VAT registered businesses can claim bad debt relief on the supply of goods or services that you have not been paid for. There are certain conditions which must be met to claim VAT relief on bad debts, including:

  • The debt must be at least six months old
  • You must already have accounted for the VAT on the supplies and paid it to HMRC
  • You must have written off the debt in your 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

A bad debt claim only requires an adjustment to box 4 of the VAT return and must be written off in the accounts. Bad debt relief can be claimed for any debts going back over the past four years and six months. Writing it off in the accounts has the added cashflow benefit of reducing the businesses’ corporation tax bill.

If the bad debt has been written off in the accounts, it doesn’t mean that the business can’t continue to chase the debtor for the full amount. If the customer eventually pays some or all of the invoice amount, the VAT element is paid back to HMRC at that time.

A customer who does not settle their debt within six months of it being due is required to amend their VAT return to repay any VAT that they have claimed back previously.

You can read more about bad debt relief on the GOV website.

In difficult times, businesses need all the help they can get and bad debt relief can be used as soon as debts are over six months old to boost cashflow when it is really needed.

If you would like to discuss reclaiming VAT on bad debts, you can contact our VAT Taxperts by calling one of our offices or emailing [email protected].

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