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Business Tips

What is VAT bad debt relief?

If you are a VAT registered business, you will need to charge VAT at the prevailing rate on the sale of taxable goods and services.  Many businesses provide such goods and service on credit, such that purchasers will be given a period in which to settle any outstanding amounts.

However there are times when debts are not repaid and are said to be “bad debts” or have “gone bad”.  This means that the business recognises it will not recover the amount outstanding from their customer.

In this situation, the business may decide to write off the debt, therefore recognising in the accounts that this amount will not be recovered.  However in most cases the VAT registered business would have charged VAT on the sale and already paid this to HMRC.

In such situations, it is possible to adjust your VAT account and reclaim any VAT on such bad debts.  There are conditions, which are as follows:

  • The debt must be more than six months old, but less than fifty four months old.
  • The debt has been written off for accounting purposes.
  • The debt has not have been sold on or factored.
  • The seller did not charge more than the normal selling price for the items.

Assuming these conditions are met, VAT bad debt relief can be claimed.

The VAT registered business will need to amend their VAT account and VAT return, using the correct VAT fraction to calculate the VAT repayable.  Rather than getting cash repaid, in most cases a business will receive a credit against the VAT in the period of the claim.

There are more complex rules in the case of part payments or insured claims.  The business will also be required to keep records as appropriate.

Businesses in industries with long payment periods, or with high levels of bad debts, may wish to consider whether cash accounting is a more preferable option in the longer term, since this removes the VAT exposure that such issues cause.

Wisteria provides specialist VAT advice on a wide range of VAT issues including VAT bad debt relief. For more information on VAT or Wisteria’s VAT advice services, please contact us on 020 8429 9245.