Bad Debt Relief For VAT Filers

While we are under a severe economic condition and there is a risk that some businesses might not pay their suppliers.

There are rules available where a business can claim relief where a customer does not pay.

Background:

The bad debt relief rules are intended to ensure that VAT is not a cost to a business that suffers a bad debt following non-payment by customers.

Those businesses which are under the Cash Accounting Scheme, they avail bad debt relief automatically.

At the same time, such businesses have a disadvantage that they can’t claim input on purchase invoices until they have paid to suppliers.

How it works:

A business can claim bad debt relief on a VAT return (positive entry in Box 4) when ALL the following conditions are met:

• The sales invoice in question is more than six months overdue for payment;
• The invoice has been written off in the business’s accounting records;
• Output tax must have been paid to HMRC on a past VAT return;
• The debt must not have been sold, factored or paid under a valid legal assignment.

The latest time a claim can be made in four years and six months after the later of:

• The time of supply (usually the invoice date); or
• The due date for payment.

If an invoice is written off and bad debt relief has been claimed, then output tax must be declared on any payment subsequently received from the customer (HMRC notice 700/18 para 2.2).

If you have any question on the VAT issues; feel free to contact us