If you are VAT registered, made supplies to a customer and have not been paid then you should consider making a claim to recover the VAT that has been paid to HMRC on the respective supply.
There are various conditions and rules that need to be followed in order to claim the VAT bad debt relief and although these rules have been around for some time it is useful to remind ourselves of the various steps that need to be followed to make a valid claim.
Current time limit to make a claim for bad debt relief
The general time limit for making a claim for supplies made after 30 April 1997 is 4 years and 6 months from the later of the due date of payment for the supply or the actual date of supply (there are other rules that may apply for supplies made between 1 April 1989 and 30 April 1997). The due date of payment may be determined by your normal credit terms or an arrangement made with customer if longer.
Conditions to make a claim for bad debt relief
In order to claim relief from VAT on bad debts there are 7 conditions that need to be met. The first five detailed below apply to supplies made after 30 April 1997.
1. You must have already have accounted for the VAT on the supplies and paid it to HMRC.
2. You must have 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 must not be more than the customary selling price.
4. The debt must not have been paid, sold or factored under a valid legal agreement (see 3.12 of HMRC VAT notice 700/18).
5. The debt must have remained unpaid for a period of six months after the later of the time payment was due and the date of supply
Conditions 6 and 7 wholly apply to supplies made before 30 April 1997 –see HMRC VAT notice 700/18.
If you account for VAT under the cash accounting scheme or one of the special VAT retail schemes then the above the bad debt relief will not apply as no VAT would have been paid to HMRC relating to the supply.
How to make claim for bad debt relief
The amount of VAT being claimed should be included in Box 4 of your VAT return which covers the date when the conditions are met to make a claim.
Records required in respect of claim for bad debt relief
You must keep records in respect of the claim which include a copy of the VAT invoice in respect of the supply for which you are making a claim – full details on these records are shown in 2.5 of HMRC VAT notice 700/18. These records must be kept 4 years from the date you make the claim.
Since 30 April 1997 you do not need to notify the customer that you are making a claim for VAT bad debt relief.
Bad debt relief claims in respect of part paid supplies
If you are making a claim for bad debt relief in respect of supplies for which you have received part payment then you can only claim a refund on the VAT relating to the amount that is still unpaid. The payment should also be allocated to the earliest supply (unless customer specifies payments relates to a particular supply which paid for in full). An example of the operation of the rules for allocating payments of part paid debts is shown in 3.3 and 3.4 of HMRC VAT notice 700/18.
Other circumstances
Where you have provided finance in respect of a supply or provided security in respect of a debt or there are other unusual circumstances relating then you consider sections 3.5 to 3.13 of HMRC VAT notice 700/18.
Payment received on supply after making claim for bad debt relief
If you have received a refund in respect of a claim for VAT bad debt relief and you later receive a payment for the supplies then you must repay the VAT element included in the payment. The payments received for the supply/supplies must be shown in a separate bad debt account. The VAT being repaid should be shown in Box 1 of your VAT return. If you are no longer VAT registered then you must still repay the appropriate VAT and contact HMRC for guidance.
If you require further advice or assistance with VAT bad debt relief claim then please contact us.
