VAT Relief for Bad Debt: What to Know

What is VAT relief? UK businesses that have made supplies to customers and have not been paid for those goods or services can claim relief for the VAT on bad debts if they meet all the conditions.

The benefits of VAT relief

Value added tax, or VAT, is employed on goods and services at every stage of production. There are some VAT exempt goods and services, such as a health service in the medical profession. But for the most part, VAT for illegible items is paid by businesses for the majority of products.

VAT relief for bad debts can be helpful to businesses when their customers fail to pay for goods and services. The option to apply for relief is always valuable. During periods of economic turbulence, VAT relief is especially useful, potentially cushioning businesses from some of the effects of a cash flow squeeze. 

When can you apply for VAT relief for bad debt

You can only apply for debt relief if you have actually supplied the relevant goods or services. At least six months must have passed since the goods were supplied and payment was due.

If those two basic factors have been met – the items were actually supplied, and more than six months have elapsed without due payment – a number of financial requirements apply.

The conditions for claiming bad debt relief

HMRC specifies seven conditions for claiming bad debt relief. These are: 

1. You must have already accounted for the VAT on the goods or services (i.e. via your VAT return) and paid it to HMRC 
2. You must have written the debt off in your day to day VAT accounts and transferred the amount to a bad debt account
3. The value of the goods or services is not more than the customary selling price
4. The debt cannot have been paid. In addition, you cannot have sold or factored in the debt
5. The debt remains unpaid six months after the goods or services were supplied and payment was due
6. If goods were supplied before 19 March 1997, ownership must have passed to your customer (or a third party via your customer)
7. If supplied were made to a VAT-registered customer between 26 November 1996 and 30 April 1997, you must send them a notice

Record keeping

In order to claim a VAT refund you need to keep the following records:

• A copy of the VAT invoices for all relevant supplies
• Name and delivery information of the customer
• The VAT eligible items on which the debt is owed
• A specific bad debt account detailing the amount written off as bad debt and the amount of VAT you are claiming as bad debt relief, among other details.

How much can you claim?

There is no specific amount you can claim. Rather, the amount is determined by the outstanding amount owed to you. If you have made a supply and received no payment, you can claim the full amount of VAT for which you have already accounted for and paid. However, if you received partial payment for the supplies, you can claim proportionally to the outstanding amount.

What if I am insured against bad debts?

If you pay for insurance against bad debts, an insurance payout does not affect your claim. 

However, if you receive a payment from a guarantor on the debt, then your claim is reduced by the amount paid. If the guarantor pays the full amount then you cannot claim bad debt relief.

What if you receive payment after claiming relief?

If you receive a payment for supplies after you have claimed VAT relief for those bad debts, then you must repay the VAT element to HMRC.

A better way to manage VAT

While the business is responsible for the VAT on an eligible product or service, they should not have to face the challenges of not receiving payments from their customers. VAT relief for bad debts is especially useful for managing cash flow when multiple clients, or a company’s major client, defaults on debts.

However, even under more optimal business conditions, effectively taking advantage of VAT reclaim opportunities can help reduce the cost of doing business. 

As the leading VAT compliance and reclaim specialists, VAT IT helps businesses maximise their VAT recovery opportunities. To optimise your company’s VAT, learn more about VAT IT’s reclaim and VAT compliance services.