VAT - BAD DEBT RELIEF

VAT Bad Debt Relief - Under the normal rules of VAT, a supplier has to account for output tax even if the supply has not been paid for. Bad debt relief allows businesses to claim a refund of the VAT.  (The use of cash accounting removes the problem of VAT on bad debts)

Conditions for bad debt relief for those businesses operating invoice accounting:

• The debt must not have been sold, factored or paid under a valid legal assignment
• The invoice has been written off in the business records and accounts
• The sales invoice is more than six months overdue for payment
• Output VAT on the invoice must have been declared and paid to HMRC on a VAT return

Procedure for claiming relief - A common mistake is the way in which bad debt relief is claimed on the VAT return. The claim is made in Box 4 (Input VAT on purchases) rather than as a reduction to the figure in Box 1 (Output VAT on sales). Furthermore, no adjustment is required to boxes 6 (Net sales) or 7 (Net purchases) since a sale has still been made, it just hasn't been paid.

Another common mistake is to make the claim 6 months after the date that the invoice in question was raised, whereas it shouldn't be made until 6 months after the date the invoice was due for payment. So, if you allow customers 30 day payment terms, then bad debt relief is not due until 6 months and 30 days after the invoice date.

Records required - Various records and evidence must be kept in particular to identify the time and nature of the supply, the purchaser, consideration and amount of VAT chargeable on the supply, the accounting period when the VAT was accounted for and paid to HM Revenue & Customs, any payment received for the supply, entries in the refund for bad debts account & the period in which the claim is made.

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