Tax Video Update - VAT and Bad Debts

29 November 2013 •

Warrener Stewart Tax Update

VAT and Bad Debts

Why the reminder?

Given the number of problems businesses are facing collecting money from their customers we thought this would be an ideal opportunity to discuss how to claim back output VAT on an unpaid sales invoice.

Tax relief available

This is obviously not relevant to clients on cash accounting as VAT is only paid over to HMRC when an invoice is settled.

In other circumstances output tax is declared on a VAT return based, more often than not, on the date of the sales invoice.  Consequently VAT can be paid over to HMRC prior to settlement of the invoice.  This can cause cash flow problems especially if the customer never pays. 

We therefore think it is important that businesses know how to reclaim the VAT paid to HMRC and in doing so reduce the loss suffered to the net amount of the invoice.

Conditions for reclaiming output VAT

The main condition is that the debt must be more than six months overdue for payment.  A common mistake is that the first point at which bad debt relief can be claimed is six months from the date of the sales invoice.

The other two conditions are that debt has been written off in the accounts of the business and it has not been paid, sold or factored under a valid legal agreement.

Another common mistake is that legal proceedings must have started in order to make a claim, this is no longer the case.

One final point to consider is that to ensure HMRC are not out of pocket the above rule works both ways.  Consequently, if there are creditors which have been outstanding for more than six months HMRC can request that any input tax claimed is repaid.  However, the positive point to remember is that input tax can be reclaimed at a future date if the invoice is eventually paid.

Conclusion

Having a debt which is unlikely to be settled can cause problems.  However knowing how to claim back the output VAT at least mitigates to some extent the loss suffered. If you are in any doubt whether you can benefit from the above, please get in touch and we will be happy to answer any queries you may have.