Understanding VAT Bad Debt Relief

Struggling with unpaid invoices? If you've paid VAT to HMRC but never received payment from your customer, you may be able to reclaim that VAT. Learn how bad debt relief works and whether switching to cash accounting could ease your VAT woes.

The VAT bad debt relief provisions enable businesses to reclaim VAT that has been paid to HMRC when a customer fails to pay for goods or services within a reasonable period. This typically applies when an invoice has been issued, but payment has not been received for an extended period (usually six months after the due date).

Under standard VAT accounting procedures, businesses are required to account for VAT at the time an invoice is issued, regardless of whether payment has been received. However, businesses can claim bad debt relief if specific conditions are met.

The primary conditions for claiming bad debt relief, as outlined in HMRC’s guidance, include:

1. The VAT on the supply must have already been accounted for and paid to HMRC.
2. The debt must be written off in the business’s regular VAT accounts and transferred to a separate bad debt account.
3. The value of the supply must not exceed the usual selling price.
4. The debt should not have been paid, sold, or factored through a valid legal assignment.
5. The debt must remain unpaid for at least six months after the later of the payment due date or the supply date.

It is important to note that businesses using the cash accounting scheme, or those that use certain retail schemes, only account for VAT on the amounts they have actually received from customers. As such, businesses operating under these schemes are generally not required to make bad debt relief claims, as VAT is only paid once payment is received.

Small businesses experiencing significant issues with bad debts may find it beneficial to apply for the cash accounting scheme, as this can help mitigate VAT liabilities by deferring payment until the customer settles their debt.