The VAT bad debt relief rules allow businesses to claim bad debt relief and reclaim the VAT they have paid to HMRC. This can happen when an invoice has been issued to a customer and no payment has been received after an extended period of time (usually 6 months after the due date) has elapsed.
Under the normal VAT accounting rules, a business supplying goods or services usually accounts for VAT at the time an invoice is raised irrespective of whether payment has been received or not. There are a number of conditions which must be met in order to claim bad debt relief.
The conditions are set out in HMRC’s Notice 700/18 entitled Relief from VAT on bad debts:
- You must already have accounted for the VAT on the supplies and paid it to HMRC.
- You must have written off the debt in your day to day 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 not have been paid, sold or factored under a valid legal assignment.
- The debt must have remained unpaid for a period of 6 months after the later of the time payment was due and payable and the date of the supply (one year after the date of supply for supplies made from 1 April 1989 to 31 March 1992), and
- if the goods were supplied before 19 March 1997, ownership must have passed to your customer, or through the customer to a third party.
- For supplies made to a VAT-registered customer between 26 November 1996 and 30 April 1997, you must send a notice to them. A copy of the notice must also be retained.
Businesses that account for VAT under the Cash Accounting Scheme and businesses that use certain retails schemes only pay VAT on the cash amounts they have actually received from customers. This makes bad debt relief claims unnecessary as VAT is only paid when the customer pays what is owed. Small businesses that suffer from a significant amount of bad debts should consider if it would be beneficial to apply to use the Cash Accounting Scheme.