VAT and bad debt relief

Unless you use the VAT cash accounting scheme you have to account to HMRC for the VAT you charge on sales even if the customer does not pay you.

Posted September 25th 2020

Unless you use the VAT cash accounting scheme you have to account to HMRC for the VAT you charge on sales even if the customer does not pay you. However when you write off a sales debt as bad you can reclaim the VAT from HMRC if it meets these conditions:

at least six months have passed since the payment date for the invoice (not invoice date); the debt has not been assigned, sold on or factored; and the VAT was declared to HMRC on a VAT return.

The latest you can reclaim VAT on such bad debts is 54 months after the due date for payment so it is worth reviewing your old bad debts to check whether any have been missed. Businesses which use the flat rate scheme (FRS) can also reclaim VAT on bad debts where the above conditions are met.

Example

Shaun is a builder using the FRS with a rate of 9.5%. He charges his customer £6,000 including VAT of £1,000. Shaun pays HMRC £570 (9.5% x £6,000) under the FRS. His customer does not pay so six months after the due date Shaun can claim £1,000 from HMRC as bad debt relief.

Resources

VAT Cash Accounting Scheme

VAT Bad Debt Relief

Last updated: April 29th 2021.

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