Tax & Accounting News

Bad Debt Relief and VAT

29/10/2009

How to claim tax relief on bad debts has always been an area of concern for many businesses, particularly in the current economic climate. Companies are allowed to claim back VAT and, in some circumstances, Corporation Tax, but they need to follow the correct rules.

The first stage of reclaiming tax involves identifying what debts exist. A general estimate is not allowed even where there are many small debts outstanding – each debt has to be considered individually. The business must also have made a reasonable effort to recover the debt, as appropriate for the amount concerned.

It is also worth remembering that claims can be made for the year in which the invoice was issued, even if the customer did not go bust until later.

There are a number of rules in place which firms should bear in mind when attempting to reclaim tax on a bad debt:

• Unless you are using Cash Accounting, you must account for VAT when you raise an invoice, even if you have not been paid.
• You can reclaim the VAT if a customer does not pay, but only once the debt has been outstanding for six months, and written off in the VAT account. The amount must also previously have been declared on a VAT return.
• It is no longer necessary to contact the non-paying customer concerned when you make a claim relating to their debt. The rule that suppliers must be informed when this happens was abolished in 2003.
• A claim for the VAT on a debt is made on your VAT return, by stating your entitlement to a refund in box 4 of the form. You must also compile and retain a Bad Debt Relief schedule to support the return.
• If a claim is made for bad debt relief, and the customer subsequently pays, it must be stated on the return period covering the date the payment was received.
• If a customer makes a part payment, only the unpaid portion of the bill may be considered for Bad Debt Relief.
• Bad Debt Relief is designed to help with the problem of non-paying customers, not late-paying customers. The Cash Accounting Scheme deals with the disadvantages of slow payment, but it has certain limits and exemptions and must be used for sales and purchases.
• If you have not paid a supplier for goods or services, but have claimed back the VAT on that purchase, the VAT must be repaid within six months, using Box 4 of your VAT return form.

For more information or advice, please contact us.