Tax & Accounting News

Reclaiming VAT

23/02/2009

With the credit crunch claiming an increasing number of businesses as its victims, their suppliers need to be alert to reclaiming VAT paid on bad debts for goods supplied.

VAT on unpaid sales invoices can be claimed if all the following apply:

• the VAT was included on an earlier sales invoice
• the relevant debt is more than six months overdue for payment
• the invoice or invoices have been written off as bad debts in the supplier’s business accounts.

When all these conditions apply, the supplier can recover the VAT originally paid by adding the VAT element of the bad debt to the input tax figure in Box 4 of the return.

Although the standard rate of VAT was reduced to 15 per cent on 1 December 2008, if the rate on bad debt sale was originally accounted for at 17.5 per cent, the supplier can reclaim the VAT at 17.5 per cent.

Having reclaimed the VAT, if the supplier then receives payment from the client, the bad debt relief must be repaid on the VAT return that covers the payment date.

For example, if a supplier receives a payment of £1,175 against a debt of £4,700 (£4,000 plus £700 in VAT at 17.5 per cent), the supplier must repay VAT of £175 (VAT levied at 17.5 per cent on £1,000).

If a business has reclaimed VAT (input tax) on a purchase invoice that is more than six months overdue, they must repay the VAT claimed on the invoice by adjusting the Box 4 figure on their next VAT return. When they do pay their supplier, they can then claim the VAT in input tax as usual.

For smaller businesses, the cash accounting system can avoid many of these VAT issues.

With cash accounting, the supplier pays no VAT until they have been paid by their customer. If your customer never pays, the supplier never has to pay the VAT.

Cash accounting is available to businesses with an estimated turnover during the next tax year of not more than £1.35 million and they can continue to use the system until their estimated turnover exceeds £1.6 million.

If you would like more information on any aspect of VAT, please contact us.

 

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