TT183: Relief from VAT on Bad Debts

People often forget or perhaps overlook that if you are a registered VAT Trader and one of your customers doesn’t pay you, you may be entitled to reclaim any VAT you have accounted for if and when the debt becomes “bad”!

With the increase in the VAT rate to 20% in January 2011 this “Bad Debt Relief” (BDR) offers some help as long as certain conditions are met.

The detailed rules and regulations are set out in the useful leaflet recently re-issued by HM Revenue and Customs Notice 700/18 but the basic rules are:-

  • The debt must have been unpaid for at least 6 months after the “relevant date”
  • The “relevant date” is the later of;
  • The date the amount became due and payable

or

  • The date of supply
  • In most cases the due and payable date will be most relevant and obviously this will depend on the credit period that you give to your customers i.e. 30 days, 60 days or 90 days etc.
  • At the time of making the claim the debt must not be assigned to a factoring company but in most cases when the debt is believed to be bad most factoring companies will arrange to reassign it back to the trader.
  • If you hold security all or part of the debt which is enforceable then the amount of the BDR claim must be reduced by any amount of value you receive from the security.
  • Conversely, if you pay a premium to insure against bad debts the payment by the insurer for all or part of the debt does not effect your entitlement to make a full BDR claim for the VAT element.
  • If a company is a member of a VAT Group each member must keep its own records in respect of bad debts but is the responsibility of the “representative member” to make the formal claim for any refund for all group members.

Of course the ideal situation is to try and avoid bad debts altogether but where this is not possible this relief offers some solace!

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