Are you curious about how to claim VAT relief on bad debts? When it comes to business, sometimes customers can’t pay what they owe you. And, when this debt is considered irrecoverable – meaning that there is no reasonable expectation of receiving payment – VAT relief can be claimed from the government. 

Learn exactly how to claim for this provision with the help of leading UK accountancy firm Williamson & Croft and our years of tax-related expertise.

What Is VAT Bad Debt Relief?

Essentially, it is a provision outlined by the government that allows businesses to recover their value-added tax (VAT) on sales they have accounted for, but haven’t received any payment. To be considered a bad debt under HMRC, this payment must be irrecoverable, meaning it is highly unlikely to ever be paid. 

If you need to resolve the complexities of VAT, Williamson & Croft can help. We have a team of specialist tax advisors waiting to help simplify your tax accountancy.

What Are the Conditions for Claiming?

The conditions for claiming VAT relief on bad debts for businesses are as follows:

1. Irrecoverable Debt

As mentioned above, the main condition for claiming VAT on bad debt is being owed an irrecoverable debt. There must be no reasonable expectation of receiving payment, and your business must have a record of unsuccessful attempts at reclaiming the debt. 

Furthermore, when it comes to the value of the debt concerned, specifically if this debt involves a product or service supplied to a customer, it cannot exceed the open market value.

2. Accounted for VAT

To be eligible, you should have already accounted for the VAT on the original sale in a VAT return that has been declared and paid to the HMRC. 

It is best practice to not only account for and write off the debt, but transfer it to a separate bad debt account.

3. Time Constraints

Claiming VAT relief on bad debts is bound by specific time constraints. You must wait for a specific period of time to pass since the due date of payment to be absolutely sure the debt is irrecoverable. This period is typically six months, though this may depend on your circumstances.

Significantly, a bad debt claim cannot predate April 1989, and, for products or services provided before March 1997, you are only able to make a claim if your business’ property passed to the customer in good faith.

4. Proper Documentation

It’s important to have the documentation of your filed VAT return available, alongside all other relevant paperwork, to be handed into HMRC. You must also make sure you have adjusted for bad debt relief on the VAT return covering the period in which your debt became ‘bad.’

5. Continuity of Business

When you make your claim, your business must still be actively trading. 

Who Can Claim?

Any active business with an irrecoverable debt can claim for VAT bad debt relief with the HMRC. It does not matter whether you are a big conglomerate or a sole trader, as long as you are still trading at the time of your claim and, of course, you are a VAT-registered business. 

When Can They Claim?

Generally, businesses can claim at six months after the original debt was due to be paid, and if there are several recorded attempts at recouping the debt without success.

What’s the Process for Claiming?

The process for claiming bad debt relief can seem intimidating, especially without the aid of tax professionals like Williamson & Croft. This is because even minor slip-ups when it comes to documentation can land you in hot water with important tax authorities! Nevertheless, there are some certifiable steps you can follow to make an HMRC claim. These include: 

  • Notifying HMRC

To notify HMRC that you would like to claim a VAT bad debt refund, include the amount of VAT you are claiming in box 4 of your VAT return. However, you cannot make a claim until you have fulfilled all of the necessary conditions – including waiting a period of 6 months minimum.  

  • A 6-month waiting period must commence

The 6 month waiting period before claiming your VAT bad debt relief is non-negotiable. This is an integral part of the process, as it gives your customer a substantial amount of time to begin repaying the debt after the due date. Nevertheless, if you file a claim after this time period and the debtor then repays part of their debt, you must repay HMRC yourself, by way of your VAT return.

  • Submit your forms and documents

You can generally submit important forms and documents to HMRC via the post, or via their online portal. 

The documents (alongside your VAT return) that you would need to submit for your claim include, but may not be limited to:

  • Evidence of your bad debt account, as described by the government
  • A VAT invoice, or a copy of an original invoice made to the customer, like a proforma invoice
  • Evidence of the prescribed accounting period in which the debt was accounted for
  • Details of the amount claimed, including payments received and the calculation of the outstanding amount
  • Evidence that the unpaid debt has been written off as irrecoverable

Reach Out to Williamson & Croft for Expert Tax Accountancy Services, Today

At Williamson & Croft, we can assist you in recovering bad debts, and navigating the documentation and personal details required for a successful VAT bad debt relief claim. There’s no need to struggle to regain these kinds of losses for your business, when we are here to assist. Reach one of our expert tax accountants by phoning us on 0151 303 3112, or our contact page.