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11 June 2018

Claiming VAT back in bad debts


I operate a small business and I give my customers 30 days credit. I have noticed in the last 6 months that I am waiting for longer to collect the monies from these sales. I have paid the VAT on these sales but I have not received any payments. Can I recover the output VAT paid?


In these times of economic uncertainty, it is more likely that you may have customers who are not going to pay their bills on time, and a few who may not pay them at all. For many businesses cash flow is tight and so any help to ease the burden of bad debts is welcome.

Bad debt relief allows businesses, that have made supplies on which they have accounted for and paid VAT but for which they have not received payment, to claim a refund of the VAT by reference to the outstanding amount.

However, there are a number of conditions that must be met and some additional record-keeping to be done before you can take advantage of the relief.

  1. You must have made a supply to and charged the VAT to your customer. The VAT must have been accounted for to HM Revenue & Customs (HMRC) by including it on a previous VAT return and paying the VAT due on that return. You cannot make a claim for bad debt relief on sales made under the Cash Accounting scheme; that is where you do not account to HMRC for VAT on your sales until you are paid.
  2. The debt must be six months overdue. This is measured from the date the debt was due rather than the invoice date, (or from the date of the supply if this was later than the due date). So if you offer 30 days credit in your terms of trade you must wait 30 days and the six months before you can claim bad debt relief. It does not matter whether your customer has already gone into liquidation, bankruptcy, etc. You must still wait the six months plus the normal credit period.
  3. The debt must be written off in your accounts. This can be done by way of a memo account if you want to provide against the debt rather than write it completely out of your records. However, a “refunds for bad debts account” must be maintained. You cannot write off a debt for VAT purposes by simply issuing a credit note.
  4. The supply must not have been made at an above open market value (taken to mean the customary selling price).
  5. You must not have sold or factored the debt under a legal assignment. If a factored debt is reassigned to you under the terms of the factoring agreement you can then claim VAT bad debt relief.
  6. A claim is made by entering the appropriate amount in Box 4 of the VAT return for the period in which entitlement to the claim arises (or any permissible later period).

Businesses making bad debt relief claims must keep records for four years from the date of the claim to show:

  • The time and nature of supply, purchaser and consideration – normally a VAT invoice will show this
  • The amount of VAT and the accounting period it was paid to HMRC
  • Any payment received for the supply
  • Details of entries in the ‘refunds for bad debts account’.

Where a customer has not paid a supplier within six months of the date of the supply or, if later, the date payment is due, VAT previously claimed as input tax, must be repaid. This puts a burden on all VAT registered traders to monitor their transactions to anticipate whether they need to reverse any input tax recovered on goods received from suppliers.

The advice above is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
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