Within the VAT system, businesses might find themselves paying VAT to HMRC even if they haven’t received payment from their customers. Bad debt relief enables businesses to claim back VAT on supplies for which they’ve accounted and paid VAT but haven’t received payment.
What is the process for claiming it back? With our outsourced bookkeeping service, we stay on top of all regulations to ensure your business thrives without having to worry about the intricacies of VAT. Here, we showcase the steps needed to claim bad debt relief to keep your business well-informed and compliant with VAT regulations.
Conditions for Claiming Bad Debt Relief
To claim bad debt relief, a business must meet several conditions:
- The goods and services must have been supplied, and the VAT in question must have been accounted for and paid to HMRC.
- At least six months must have passed since the date of supply or the due date for payment, whichever is later.
- The debt must not have been sold, factored, or assigned to another party.
- The outstanding amount, whether in full or part, must have been written off in the day-to-day accounting records as bad debt.
Making the Claim
To make a claim:
- Enter the appropriate amount in Box 4 of the VAT return for the period in which the claim arises (or a permissible later period).
- Do not issue a credit note to the customer for any bad debt claims.
- The VAT relief amount is calculated based on the outstanding amount. For partial payments received, treat the remaining outstanding amount as VAT-inclusive, and claim relief only on the unpaid VAT portion.
If the customer makes a partial or full payment after a claim is made, the business must adjust or reverse their claim accordingly.
Record Keeping
Businesses must retain records for four years from the date of the claim, including documentation that shows the time and nature of the supply, purchaser, and consideration, typically provided on a VAT invoice. These records must also indicate the amount of VAT and the accounting period in which it was paid to HMRC, any payments received for the supply, and details of entries in the ‘refunds for bad debts account’.
Repayment of Input Tax by Purchasers
This measure, focusing on the customer rather than the supplier, requires customers who haven’t paid their supplier within six months of the supply date or the due payment date to repay the VAT previously claimed as input tax to HMRC. This obligation necessitates that all VAT-registered businesses monitor their purchase ledger to anticipate any needed reversals of input tax recovered on goods and services received.
How We Can Help
Proper record-keeping is crucial for VAT compliance and claiming bad debt relief. By understanding and adhering to these requirements, your business can avoid penalties and ensure smooth VAT and tax operations.
We are here to support your business at every stage of its journey with expert guidance and advice on VAT and bad debt relief. If you would like to discuss VAT record-keeping requirements or need help navigating any issues related to bad debt relief, please contact our Commercial Client Director, Fabrice Legris, at fabrice.legris@fiandertovell.co.uk.