Claiming VAT Bad Debt Relief

Introduction

If you've supplied goods or services to a customer who hasn't paid you, you can reclaim the VAT you've already paid to HMRC through bad debt relief. You must wait at least 6 months after payment was due before making a claim, and you'll need to meet specific conditions and keep detailed records. This article explains how the relief works, when you can claim it, and what documentation you need to maintain.

What is VAT bad debt relief?

VAT bad debt relief allows you to reclaim VAT that you've already paid to HMRC on supplies where your customer hasn't paid you. This applies to supplies made on or after 1 April 1989, whether the payment was meant to be in money or through a barter arrangement involving goods or services.

If you use the Cash Accounting Scheme or certain retail schemes that adjust for opening and closing debtors, you won't need bad debt relief because you only pay VAT on money you've actually received from customers.

Conditions you must meet

To claim VAT bad debt relief, you must satisfy all of the following conditions:

1. You've already accounted for and paid the VAT to HMRC on the original supply

2. You've written off the debt in your day-to-day VAT accounts and transferred it to a separate bad debt account

3. The value of the supply doesn't exceed the customary selling price

4. The debt hasn't been paid, sold or factored under a valid legal assignment

5. At least 6 months have passed since the later of: the date payment was due and payable, or the date of supply (for supplies made between 1 April 1989 and 31 March 1992, the waiting period was one year)

6. For goods supplied before 19 March 1997, ownership must have passed to your customer or through them to a third party

7. For supplies to VAT-registered customers between 26 November 1996 and 30 April 1997, you must send them a notification and keep a copy

The payment due date is determined by your normal credit terms or any longer payment period you've agreed with your customer.

Time limits for claiming

You can claim bad debt relief once you've waited at least 6 months from the later of:

• When payment was due and payable
• The date of supply

For supplies made after 30 April 1997, you must claim within 4 years and 6 months of the later of these two dates.

You cannot claim relief in a VAT return for an accounting period earlier than the one in which you become entitled to make the claim.

How to make your claim

To claim bad debt relief, include the VAT amount you're reclaiming in box 4 of your VAT return for the period covering the date when you meet all the conditions to claim.

Records you must keep

When claiming bad debt relief, you must maintain:

1. A copy of the VAT invoices for the supplies (or if you didn't issue a VAT invoice, a document showing the equivalent information)

2. A separate bad debt account containing:

• The amount written off as a bad debt
• The amount of VAT you're claiming as bad debt relief
• The VAT period in which you claimed the refund
• The total VAT charged on each supply
• The VAT period when you originally accounted for the VAT
• Any payments received for each supply
• Your customer's name
• The date and number of the invoice relating to the bad debt (or sufficient information to identify the time and type of supply if no invoice was issued)
• A copy of any notification sent to the customer

How long to keep records

You must keep all these records for 4 years from the date you make your claim. However, this doesn't change the standard requirement to retain VAT records for 6 years.

Notifying customers (for certain supplies)

If your claim covers supplies made between 26 November 1996 and 30 April 1997 to a VAT-registered customer, you must send them written notice within 7 days of making your claim. The date of your claim is the date you send HMRC the VAT return containing the claim.

The notice must include:

• The date you issued the notice
• The date of your claim to bad debt relief
• The date and number of any VAT invoice for each supply included in your claim
• The amount written off as a bad debt for each relevant supply
• The amount of the claim (except for supplies under a Margin Scheme)

The notice can be included in your existing debt recovery correspondence or sent separately. It should remind the customer that they must repay any VAT they claimed on these supplies to HMRC until they make payment, and that payment remains due.

Sources

• Relief from VAT on bad debts (VAT Notice 700/18)

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.