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Claiming VAT Relief on Bad Debts

View profile for Catherine Rickett
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With the world in a very strange place and businesses struggling to pay invoices, there is every possibility that even if you have never fallen victim to a bad payer in the past, you may find yourself with a client who will not, or cannot pay you.

If you supply goods or services to a client and are not paid for those goods or services, then you may be able to claim relief from VAT on bad debts that you have incurred. Whilst we are here to assist you in recovering these bad debts; sometimes it is not possible, for example, if the company goes into administration or an individual becomes bankrupt. 

Not all businesses are aware that VAT-registered businesses can obtain bad debt relief from HMRC. This means that you may be able to reclaim the VAT element of the supply of goods or services that you have not been paid for.

In order to reclaim the VAT, the debt must be unpaid for a period of at least six months after the later of the date payment was due or the date of supply. The business must also have supplied the goods or services and accounted for and paid the applicable VAT to HMRC. Finally, the amount needs to have been written off as a bad debt in a VAT bad debt account.

There are seven conditions which must be met to claim VAT relief on bad debts including:

  • The debt must not have been paid, sold, or factored under a valid legal assignment.
  • If the goods were supplied before 19 March 1997, ownership must have passed to your client, or through the client to a third party.
  • You must have already accounted for the VAT on the supplies or services and paid to HMRC.
  • You must have written off the debt in your usual 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 have remained unpaid for a period of six months after the later of the time payment was due and payable and the date of supply.
  • For supplies made to a VAT-registered client between 26 November 1996 and 30 April 1997, you must send a notice to them. A copy of this notice must also be retained. 

The law that covers this claiming of bad debt relief is Sections 26a and 36 of the VAT Act 1994, which covers the repayment of input tax when a customer fails to pay for its supplies received within six months of the relevant date. In order to claim a refund, you should include the amount of the VAT you are claiming in box 4 of your VAT return which covers the date when you fulfil the conditions to make a claim.  You must keep records when claiming a refund including a copy of the VAT invoices for the supplies on which you are claiming a refund and a separate bad debt account.

Note that if later, the debtor pays the debt or part of the debt, you would be required to repay the bad debt relief to HMRC by way of your tax return.