Andrew Needham looks at what records a business needs to keep when claiming Bad Debt Relief.
When a business claims VAT Bad Debt Relief it has to fulfil certain record-keeping criteria – what are they and how long do you have to keep them?
Bad debt relief
A business can claim bad debt relief for VAT charged to its customers which has not been paid within six months of the due date for payment.
To claim Bad Debt Relief, you must have paid the VAT over to HMRC so if you have not paid a VAT return or are using Cash Accounting you cannot make a Bad Debt Relief claim.
Relief for bad debts can be claimed provided that:
- the debt is six months old from the date on which payment was due or, if later, that of the supply of goods or services; and
- it has been written off in your accounts.
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 fulfilled the conditions to make a claim.
You must have written off the debt in your day to day VAT accounts and transferred it to a separate bad debt account.
Bad debt account
A business must create a ‘refunds for bad debts’ account. The Bad Debt Relief Account is not part of the statutory accounts and does not mean that the bad debt has been written off; it simply records debts that are overdue for payment by six months or more and is for VAT purposes only. The Bad Debt Relief Account is often kept as a separate manual record or spreadsheet, supplementary to the main VAT records.
The bad debt relief account should contain the following information:
- the amount you have written off as a bad debt;
- amount of VAT you wish to claim as bad debt relief;
- VAT period in which you have claimed a refund;
- total amount of VAT charged on each supply;
- VAT period in which you originally accounted for VAT on the supply;
- payment or part payments received for each supply;
- name of your customer; and
- date and number of the invoice to which the bad debt relates. (If you did not issue an invoice you must include sufficient information to allow the time and type of the supply to be readily identified)
You should also keep a copy of the invoice.
Record part payments
If you have debts owing from a customer that you supply regularly and you receive part payments of the outstanding debts you should allocate any payment received to the oldest debts first and keep a record of this.
Purchasers
Any business that does not pay its supplier has to repay the input tax claimed if the debt remains unpaid six months after the invoice date, rather than the due date for payment. The business should keep a record of the input tax repaid and the supplies to which they relate.
How long do I have to keep the records?
After making the claim for Bad Debt Relief you must keep all the records for 4 years from the date you make your claim. This requirement does not alter the standard requirement to retain records and other accounting records – for example, the sales invoices for six years.
Practical Tip:
If you claim VAT Bad Debt Relief you will need to maintain a separate VAT bad debt relief account containing specified information and keep it for 4 years.
