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VAT Bad debt relief allows businesses that have made supplies on which they have accounted for and paid VAT but for which they have not received payment to claim a refund of the VAT. We explain the situations where the relief applies. If your business is in the Worcestershire area we, at Pinfields can provide any further information you require on VAT matters.
It is quite possible within the VAT system for a business to be in the position of having to pay over VAT to HMRC while not having received payment from their customer.
Bad debt relief allows businesses that have made supplies on which they have accounted for and paid VAT but for which they have not received payment, to claim a refund of the VAT by reference to the outstanding amount.
In order to make a claim a business must satisfy a number of conditions, the key ones being:
A claim is made by entering the appropriate amount in Box 4 of the VAT return for the period in which entitlement to the claim arises (or any permissible later period).
It is not permitted to issue a credit note to the customer in respect of any bad debt claims.
The amount of any VAT relief is calculated with reference to the outstanding amount. In cases where part payment has been received from the customer the outstanding amount must be treated as VAT-inclusive, and hence relief can be claimed only on VAT relating to the amount that remains unpaid.
If a claim for bad debt relief is made via the VAT return and the customer subsequently makes a partial or full payment, the taxpayer is obliged to reverse or adjust their claim accordingly.
Businesses making bad debt relief claims must keep records for four years from the date of the claim to show:
This measure might be described as the reverse of bad debt relief since it focuses on the customer rather than the supplier.
Where a customer has not paid a supplier within six months of the date of the supply or, if later, the date payment is due, VAT previously claimed as input tax, must be repaid to HMRC via the VAT return. This puts a burden on all VAT registered businesses to monitor their purchase ledger to anticipate whether they need to reverse any input tax recovered on goods and services received from suppliers.
If your business is in the Worcestershire area we at Pinfields would be pleased to help with further advice on VAT bad debt relief.