Claiming VAT back on bad debts – Tips and advice

Claiming VAT back on bad debts

In these tough times, claiming VAT back on bad debts can soften the blow of unpaid Business invoices. With continuing economic uncertainty, there has been a rise in Business Debt Collection usage.

Late payment of invoices is on the rise and any assistance to help ease the impact of this can help. This is not applicable to all bad business debts and there are certain caveats that must be met. Stringent accounting and record keeping can help Business owners take advantage of claiming VAT on bad debts.

Even with the most biggest of efforts to get your invoices paid, unfortunately it is sometimes just not possible. At least claiming back bad debt relief offers some sort of consolation in the face of no payment.

Tips and guidance for claiming bad debt relief 

1. You must have supplied either goods and/or services and charged the VAT to your customer. The VAT must have been accounted for to HM Revenue & Customs (HMRC). This means it was included on a previous VAT return and paying the VAT that was due on that return.  (You are not able to make a claim for bad debt relief on sales made under the Cash Accounting scheme. This is where you do not account to HMRC for VAT on your sales until you are paid.)
2. The unpaid business debt must be six months overdue.  This timeline is measured from the date the debt was due, not the invoice date. So if you offer 30 days credit trade terms, you must wait 30 days and the six months before you can claim bad debt relief. Even if your customer has already gone into liquidation, administration etc  You will still wait the six months plus the normal credit terms period (i.e. 30 days)
3. The unpaid debt must be documented as 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 of goods/services must not have been made at an above open market value – This means the normal selling price.
5. The business must not have sold or factored the debt under any legal assignment. If a factored debt is reassigned to you under the terms of the factoring agreement you can then proceed with claiming VAT bad debt relief.

Additional requirements for claiming VAT bad debt relief

A record of the all Business invoices you are claiming vat bad debt relief on must be kept. Additionally, it must be shown how you have calculated the bad debt relief.  If you have received part payments against the debt, you need to show how these were allocated.

There are specific rules for allocating payments in VAT Notice 700/18/02 Relief from the VAT on bad debts. You must keep the “refunds for bad debts account” as stated above.  These records are best kept in a VAT file together with the copy of the return on which the relief was claimed.

What if the debt, or part of the debt, is paid after the bad debt relief claim?

if you receive payment of the debt after the bad debt relief claim has been made, you will need to let the HMRC know. This can be either as a result of unpaid invoice recovery action or just via the customer themselves.

You will have to repay the bad debt relief to HMRC by way of your VAT return. View  guidance VAT Notice 700/18/02 or seek advice if you are in this position and not sure what to do.

What if I am late paying my suppliers?

There is a corresponding “negative” adjustment that you should make to your VAT account if you exceed your suppliers’ credit terms by more than six months.  If you have already claimed the VAT on supplies in these circumstances you should repay it to HMRC.

Further advice on claiming VAT Bad debt relief 

Further guidance on bad debt relief is available from HMRC directly. Please note Federal Management is a FCA regulated Debt Collection Agency. This article is purely designed to be informative as claiming VAT back on bad debts is not a service we provide.

We want to take Debt Collection Action

Sometimes unpaid invoices get overlooked. Whilst claiming VAT back on bad debts can help in the short term, proficient Debt Collection can help in the bigger picture. Hiring a Professional Debt Collection Agency can help hugely. If your Business is owed money or has a problem with Unpaid invoices, speak to us today for immediate help.