VAT — bad debt relief

It is quite pos­si­ble with­in the VAT sys­tem for a busi­ness to be in the posi­tion of hav­ing to pay over VAT to HMRC while not hav­ing received pay­ment from their cus­tomer.

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.

The Conditions for Relief

In order to make a claim a busi­ness must sat­is­fy a num­ber of con­di­tions, the key ones being:

• goods and ser­vices have been sup­plied and the VAT in ques­tion has been account­ed for and paid to HMRC
• six months has elapsed since the date of sup­ply and the due date for pay­ment, whichev­er is the lat­er
• The debt has not been sold, fac­tored or oth­er­wise assigned to anoth­er par­ty
• all or part of the out­stand­ing amount must have been writ­ten off in the day-to-day account­ing records as a bad debt (to a sep­a­rate ‘refunds for bad debts account’).

Making the Claim

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).

It is not per­mit­ted to issue a cred­it note to the cus­tomer in respect of any bad debt claims.

The amount of any VAT relief is cal­cu­lat­ed with ref­er­ence to the out­stand­ing amount. In cas­es where part pay­ment has been received from the cus­tomer the out­stand­ing amount must be treat­ed as VAT-inclu­sive, and hence relief can be claimed only on VAT relat­ing to the amount that remains unpaid.

If a claim for bad debt relief is made via the VAT return and the cus­tomer sub­se­quent­ly makes a par­tial or full pay­ment, the tax­pay­er is oblig­ed to reverse or adjust their claim accord­ing­ly.

Records

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 copy of the 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’.

Repayment of Input Tax by Purchaser

This mea­sure might be described as the reverse of bad debt relief since it focus­es on the cus­tomer rather than the sup­pli­er.

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 to HMRC via the VAT return. This puts a bur­den on all VAT reg­is­tered busi­ness­es to mon­i­tor their pur­chase ledger to antic­i­pate whether they need to reverse any input tax recov­ered on goods and ser­vices received from sup­pli­ers.