How to reclaim VAT on bad debts

As we continue to emerge from the pandemic and with many businesses still struggling, there is every possibility that even if you have never fallen victim to a bad payer in the past, you may find yourself with a client who is unable to pay you.

If you make supplies of goods or services to a customer but you are not paid you may be able to reclaim VAT on bad debts you have incurred.

At Cowgills we can assist you in recovering these bad debts. However, sometimes it is not possible, for example, if the company goes into administration or an individual becomes bankrupt.

VAT registered business can obtain bad debt relief from HMRC. This means that you may be able to reclaim VAT on bad debts of the supply of goods or services that you have not been paid for.

There are certain conditions which must be met to claim VAT relief on bad debts. These include:

• You must already have accounted for the VAT on the supplies and paid it to HMRC
• You must have written off the debt in your day-to-day VAT accounts and transferred it to a separate bad debt account
• The value of the supply must not be more than the customary selling price
• The debt must not have been paid, sold, or factored under a valid legal assignment

In order to claim a refund, you should include the amount of the VAT you are claiming in box 4 of your VAT return which covers the date when you fulfil the conditions to make a claim.  You must keep records when claiming a refund including a copy of the VAT invoices for the supplies on which you are claiming a refund and a separate bad debt account.

Full details of the this can be found on the Government website here.

Note that if at a later date, the debtor pays the debt or part of the debt, you would be required to repay the bad debt relief to HMRC by way of your VAT return.

Businesses that find themselves with customers that are slow payers, or with historic bad debts may find it beneficial to switch to VAT cash accounting, where output VAT is only paid to HMRC when it is received.

Finally, the bad debt relief rules also apply if you have failed to pay a supplier for goods or services six months after the due date.   Any VAT claimed as input tax must be repaid to HMRC on the next VAT return.  VAT can be reclaimed as input tax if the invoice is subsequently paid.

If you would like to discuss how our team can help you to reclaim VAT on bad debts, speak to your usual Cowgills contact, or get in touch with us here.