VAT Q&As: how to claim bad debt relief

1 September 2009

Email article : Print article : More articles like this

Claiming bad debt relief has always been an area of concern for many small businesses – and the current economic climate makes it all the more so. Here we give you the answers to the most common questions asked.

Q. I have not received payment for an invoice and have therefore not paid over the VAT. Is that correct?

A. No. Unless you are on the Cash Accounting Scheme, which has limits and exceptions, you must account for VAT when you raise your invoice, irrespective of whether you have been paid.

Q. Can I ever get the VAT back if my customer doesn't pay me?

A. Yes, but only once the amount has been outstanding for over six months and the debt has been written off in the VAT account. You can of course only claim the relief if you have previously declared the amount on your VAT return.

Q. Do I need to contact my supplier with regard to my bad debt relief claim? I am worried that this will discourage my customer from ever settling the debt.

A. Under the old rules, yes. However, the new rules which were introduced in January 2003 removed the requirement to notify non-paying customers.

Q. How do I go about making the claim?

A. The claim is made on your VAT return by including your entitlement to the refund of VAT in box 4. You must compile and retain a bad debt relief schedule to support the return.

Q. I have made a claim for bad debt relief and have now subsequently received payment. What do I do?

A. VAT is included in any sum you later receive and must be included as output tax in the return period covering the receipt of payment.

Q. My customer has part paid. Can I treat the payment as relating to the goods or services and recover the full amount of the VAT as bad debt relief?

A. No. If you charged £100 plus VAT and have received £90, you must account for VAT on the £90 using the VAT fraction which for a 15% VAT rate is 3/23. You will then have a bad debt relief claim for £3.26 (£15 less £11.74).

Q. I do have an issue with a number of my customers paying me on time. Is there a scheme that can help me?

A. Bad debt relief is intended to alleviate the burdens of non paying customers rather than businesses with slow paying customers. The Cash Accounting Scheme deals with the cashflow disadvantage of slow paying customers but has limits, exceptions and must be used for both sales and purchases.

Q. I haven't paid a supplier for goods or services I have received but have claimed back the VAT on the purchase. Is that OK?

A. You have six months grace in which to enjoy the VAT advantage but, once six months have elapsed, you must repay the VAT you have claimed by adjusting Box 4 of your next VAT return.

About the Author

Debra Dougal is a member of UK200Group Tax Panel and VAT Partner at Haslers, London. UK200Group is the leading mutual professional association in the UK with over 110 UK quality assured independent accountancy firms and lawyer firms, as well as 50 International Associate member firms around the globe. For more information email admin@uk200group.co.uk or visit www.uk200group.co.uk.

UK200Group is an association of separate and independently owned and managed accountancy and lawyer firms. UK200Group does not provide client services and it does not accept responsibility or liability for the acts or omissions of its members. Likewise, the members of UK200Group are separate and independent legal entities, and as such each has no responsibility or liability for the acts or omissions of other members.

Email:
eNewsletter archive

VAT Q&As: how to claim bad debt relief

Related articles