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 Introduction 

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Bad debt relief allows a business to claim a refund of the output tax they have paid to HMRC when they do not receive payment from their customers. A refund can only be claimed when all the conditions have been met and must be repaid if the claimant subsequently receives payment from their customer. The relief is two-sided, in that the recipient of the supplies which have not been paid for is required to repay input tax claimed.

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When businesses make taxable supplies and include VAT on their invoices, they have to pay the output VAT to HMRC on their next VAT return regardless of whether they have actually received or collected the amount invoiced (including the VAT) from their customers.  If it turns out that a customer cannot pay for the goods or services a business has invoiced them for, then this creates a problem as the output VAT has been paid to HMRC but the cash has not been received from the customer to fund this payment. This can create cash-flow problems especially where the amounts involved are significant. 

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Bad Debt Relief

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In the event of the above situation, where debts become irrecoverable,  HMRC will allow businesses to make bad debt relief claims to recover the output VAT they have paid but not recovered from the client. To be able to make a claim for Bad Debt Relief, businesses must satisfy a number of conditions. 

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Note:  Where customers have recovered the input VAT from HMRC that was invoiced by their supplier, this will have to be repaid.

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Conditions That Have to be Met to claim Bad Debt Relief

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• The debt is over six months old.

• The debt has been written off in the refunds for bad debt account.

• The claimant has a separate refunds for bad debt relief account (which may be maintained outside normal accounting systems) containing the following information:

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• The outstanding amount to which the claim relates.

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• The period in which the tax was accounted for and paid to HMRC.

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• The amount of bad debt relief claimed. 

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• The period in which the claim was made.

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• The amount of VAT chargeable on each supply

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• Any payment received for the supply

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• The date and number of each invoice issued; if no invoice has been issued the supplier must detail the date, the name of the purchaser and the nature of the supply

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• ​The debt is over six months old.

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• The debt has been written off in the refunds for bad debt account.

• The claimant has already accounted for and paid the tax being reclaimed, via a VAT return or assessment.

• The value of the supply concerned cannot exceed the open market value.

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Time Limits for Making a Claim

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 A claim for bad debt relief must be made within four years and six months of the later of the following:

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• The date when the amount became due and payable; and

• The date of the supply.

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Other Key points Regarding Bad Debt Relief Claims

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• Where Bad Debt Relief claims have been made and the customer subsequently settles the debt and VAT, then any VAT reclaimed using Bad Debt Relief will need to be repaid to HMRC.

• A debt cannot be written off in the refunds for bad debt account until six months from the date when the debt became due and payable.

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Who Can Make a Bad Debt Relief Claim

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• The Individual or company who made the supply in the first place

• The new owners of a business that was transferred as a going concern where the new business owners have taken over the same business VAT registration number and there were existing bad debts of historic sales.      

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Bad Debt Relief Exclusions

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• No entitlement to Bad Debt Relief if value of supply is greater than the open market value

• Debt has been factored to a third party

• Bad debt relief is not available to businesses that use the cash accounting scheme or one of the retail schemes that allow the daily takings total to be adjusted for opening and closing debtors.

• Where import agents have paid import VAT on their customer’s behalf and are then not paid by their customers, there is no entitlement for the agent to claim bad debt relief in respect of the unpaid import VAT. (If the agent is not paid for the services he provides there may be an entitlement to bad debt relief subject to all conditions being met).

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-Contains public sector information licensed under the Open Government Licence v3.0.

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