Recovering VAT on Bad Debt

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	Introduction			Most businesses fail to properly account for the recovery of VAT on bad debt. Some even forget to make the claim altogether. Make sure you are not throwing away the opportunity to at least recover some of your money. The first point to make is, if your annual turnover is less than £350,000, you should consider accounting for VAT using the cash accounting scheme. Under this scheme you only account for VAT on your sales and purchases when you receive money in, or make payments out. This differs to the standard method of VAT accounting, where you account for VAT when the sales invoice is first raised, or a supplier's invoice is first received. Accounting for VAT on a cash accounting basis removes bad debt from the VAT equation. In the case of a bad debt, you will not have received the relevant sales revenue to trigger the need to account for VAT in the first place. If you are unlucky enough to suffer a bad debt for which you have paid over the VAT to HM Customs and Excise, then you will at least be able to recover the VAT element back from them. The claim can only be made, however, after six months has elapsed from the date payment was due. Note you can only reclaim after six months has elapsed from the date payment was due .... not the date of supply. So if you offer 30 days credit, this will mean you will be unable to make the claim for up to seven months after the supply was made. Even if you are informed that your customer has become insolvent and ceased to trade, you will still have to wait the six months before you can make a claim. Further reading: Relief from VAT on bad debts Notice 700/18
	When you are entitled to claim bad debt relief			If you have made a taxable supply to a customer and you have not been paid, you can claim bad debt relief if you meet all of the following criteria: You have already accounted for the VAT and paid it over to Customs and Excise . You have formerly written off the debt in your accounting records (debit: bad debt, credit: sales ledger) . The debt has remained unpaid for a period of six months after the time payment is due and payable or, if later, six months after the date of supply. For supplies made after 1 May 1997, a claim for bad debt relief must be made within three years and six months of the later of, the date the payment was due, or the date of supply.
	What you must do to claim relief			Having identified you have a specific bad debt, you must: Post through the necessary accounting journals in your accounting system to write off the bad debt. Claim the bad debt relief. You cannot make a claim in a VAT return for an accounting period ending earlier than the date you are entitled to under the six months rule. Within seven days of sending the VAT return containing the bad debt relief claim, you must also inform the customer in writing that you have made it. The Customs and Excise have published a suggested notice that we have reproduced below. Make sure you always send it to your customer. Retain copies of the original invoice, journals and details of how the claim was calculated and passed through the VAT records. It is also important to retain a copy of the notice to the customer.
	Suggested text for the customer notification			To: XYZ Ltd Notification of a claim for VAT bad debt relief I hereby notify you of a claim for VAT bad debt relief in respect of the following supply/supplies made to you for which payment has not been received. Date of this invoice: 25 August 2001 Invoice date: 10 January 2001 Invoice No.: 5/01 Total amount due: £117.50 Bad debt relief claimed: £17.50 Date of claim: 21 August 2001 You are now required to repay any VAT claimed on these supplies to Customs and Excise until such time as payment is made. This notification has been issued to comply with the VAT Regulation 1995 (as amended). Payment including VAT in respect of the supplies remains due and should be made forthwith.