VAT – Bad Debt Relief

At AHACCOUNTANTS, we can provide guidance on VAT Bad Debt Relief for businesses in the Nottingham area. This relief allows businesses to claim a refund of VAT on supplies for which they have accounted and paid VAT but have not received payment from their customers.

What is Bad Debt Relief?

Bad Debt Relief enables businesses to recover VAT paid to HMRC on supplies that remain unpaid. This situation can arise when a business has already submitted VAT to HMRC but has not received payment from the customer.

Conditions for Relief

To qualify for Bad Debt Relief, the following conditions must be met:

1. Goods and services must have been supplied, and the VAT in question must have been accounted for and paid to HMRC.
2. At least six months must have passed since the date of supply and the due date for payment (whichever is later).
3. The debt must not have been sold, factored, or assigned to another party.
4. The outstanding amount must be written off in the accounting records as a bad debt, typically recorded in a separate ‘refunds for bad debts account.’

Making the Claim

To make a claim for Bad Debt Relief:

• Enter the appropriate amount in Box 4 of the VAT return for the period in which the entitlement arises (or any later permissible period).
• Do not issue a credit note to the customer regarding bad debt claims.
• The VAT relief is calculated based on the outstanding amount. If a part payment has been received, the remaining amount is treated as VAT-inclusive, and relief can only be claimed on the VAT related to the unpaid portion.

If a claim for bad debt relief is made and the customer later makes a payment (partial or full), the business must reverse or adjust their claim accordingly.

Record Keeping

Businesses must maintain records for four years from the date of the claim, including:

• The time and nature of the supply, purchaser, and consideration (usually a copy of the VAT invoice).
• The amount of VAT and the accounting period it was paid to HMRC.
• Any payments received for the supply.
• Details of entries in the ‘refunds for bad debts account.’

Repayment of Input Tax by Purchaser

This aspect is the reverse of Bad Debt Relief and focuses on the customer. If a customer has not paid the supplier within six months of the date of supply or the due date, any VAT previously claimed as input tax must be repaid to HMRC via the VAT return. This obligation requires all VAT-registered businesses to monitor their purchase ledgers closely to determine if they need to reverse any input tax claimed on goods and services received.