VAT and bad debt reliefs

In the wake of the COVID-19 outbreak, it is likely that businesses will incur an increasing number of bad debts as a result of the effect the outbreak will have on the economy. Price Bailey would therefore like to take this opportunity to remind business owners about the possibility of making bad debt relief claims for VAT.

A business can make a VAT bad debt relief claim to recover VAT that has been paid to HMRC in respect of supplies of goods or services for which they have not been paid.

There are a number of conditions that a business must meet in order to make a VAT bad debt relief.

To be eligible for the relief the conditions to be met are broadly that:

  1. The debt must be unpaid for a period of at least 6 months after the later of: the date payment was due, or the date of supply;
  2. The business must have paid the applicable VAT to HMRC; and,
  3. The amount needs to be written off as a bad debt in a VAT bad debt account.

It is worth noting, however, that businesses should continue to chase the debt as per their normal credit control procedures, and not treat the debt as irrecoverable.

Claims for VAT bad debt relief can be made on a business’ next VAT return. The debts that a business can make a claim against are limited to debts arising from the last 4 years and 6 months of the later of:

  • When payment is due and payable; or,
  • the date of the supply.

Bad debts can have a serious impact on cash flow because businesses are required to pay VAT to HMRC that they perhaps have not yet received from clients, and whilst there is a VAT deferral in place until 30 June 2020, bad debt relief claims may still be able to provide additional assistance to clients with their cash flow.

For more information on making a bad debt relief claim for VAT, please contact Douglas Todd, VAT partner on the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.


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