What if a customer doesn’t pay you for goods or services on which you have charged VAT, and you have paid that VAT to HM Revenue & Customs (HMRC), you can get the VAT back by claiming ‘Bad Debt Relief’. This is very straightforward providing you follow the right procedures and keep accurate records. Please find below what you need to do to reclaim VAT on bad debts
If you sell VAT taxable goods or services to a customer, you have to pay the VAT element to HMRC. If your customer does not pay some or all of the amount due you can reclaim the VAT you charged and paid to HMRC but did not receive. HMRC calls this ‘Bad Debt Relief’.
When you can reclaim VAT on bad debts
You can reclaim VAT that you paid to HMRC and which you have not yet received from the customer. The conditions are that:
- the debt is more than six months old and less than four years and six months old
- you have written off the debt in your VAT accounts and transferred it to a separate bad debt account
- the debt has not been sold or handed to a factoring company
- you did not charge more than the normal selling price for the item(s)
How to claim ‘Bad Debt Relief’
If you are entitled to claim ‘Bad Debt Relief, you add the amount of VAT you are reclaiming to the amount of VAT you are reclaiming on your purchases (input tax) and put the total figure in Box 4 of your VAT Return. To work out how much ‘Bad Debt Relief’ you can claim on a VAT inclusive balance, you need to apply the VAT fraction to the unpaid amount.
Any client wanting further advice on this should contact David, Margaret or any other staff member.