Andrew Needham looks at the do’s and don’ts of claiming VAT bad debt relief.
Any business that has not been paid by a customer can claim its VAT back once the debt is overdue for payment by six months. This is a useful cashflow measure for businesses with bad debt problems, but the only trouble is that you have to wait six months before you can make the claim.
Points to remember
There are number of points to remember when you make a bad debt relief (BDR) claim.
- The debt must be older than six months after the due date for payment, not the invoice date. So if your payment terms are one month you can make the claim seven months after the invoice date.
- Claims are made on the VAT return for the period they become due; they are added to the input tax claimed in Box 4 of the VAT return, not subtracted from the output tax in Box 1.
- You need to keep a separate VAT BDR account to record the BDR claimed in each period. This need only be a manual record of the amounts claimed and the dates the VAT on the invoices were originally accounted for.
Tips and traps for claims
- The debt does not need to written off in the statutory accounts and you do not need to have given up chasing it – it just needs to be more than six months overdue for payment.
- Claims should be made in the VAT quarter that you become entitled to make the claim. However, if you forget to make the claim at the right time you can still make it up to four years after the period when the claim could originally have been made. This means that the invoice could be up to four years seven months old (assuming a one month payment period). Also remember that if a late claim for bad debt relief is made and it comes to more than £10,000 you will not need to make a voluntary disclosure. Claims that are made on time are not an error and so a separate error correction is not required.
- If you have a dispute with a customer over whether VAT should have been charged and the VAT remains outstanding six months after it was due, you cannot claim back all of the VAT outstanding. HMRC views the part payment as being VAT inclusive so you can only make a claim for part of it.
Example: Calculating the relief
You issue a bill for
£1,000 plus £200 VAT. The customer disputes the VAT amount, and does not pay
it.
The £1,000 is treated as
VAT inclusive so you can only claim back £33.33 (£1,000/6 = £166.67 VAT still
due).
Part payments are treated in the same way as above – VAT BDR can only be reclaimed on the outstanding VAT amounts.
Even if a customer goes bankrupt you still have to wait until the payment is six months overdue before you can make a BDR claim.
4. Remember you can’t claim BDR if you are on cash accounting – there is already built in BDR as you only pay the output tax when you get paid!
5. If a customer eventually pays, or makes part payment, after you have claimed BDR, you need to make an adjustment and pay HMRC the VAT due on the amounts received. This is a favourite check for HMRC and if you forget to do it you will get an assessment plus VAT and penalties!
Practical Tip:
Remember to check for outstanding sales invoices that are overdue for payment every VAT quarter and make a claim. If you receive late payments do not forget to pay back HMRC any VAT due.
