Chapter 10 Bad Debt relief

Question 1

10.2 The Problem

Answer 1

Problems with VAT returns can occur when a trader fails to settle an invoice promptly. If trader A sells good to B for £1,000 plus VAT but trader B is a late payer, no cash goes across to A, but trader A still has an obligation to pay £200 output VAT. Where trader B is entitled to £200 input VAT, this causes an inequity.
If six months pass without payment, trader A can claim bad relief, they can claim the output VAT suffered six months from the original due date of VAT. Trader B is required to pay HMRC the VAT lost. If trader B does eventually pay A, then A will account for output VAT and B can claim back the input VAT.

Question 2

10.3 Conditions

Answer 2

The trader must meet certain conditions, they include:
• They have supplied goods or services that have been accounted for and paid the output tax to HMRC
• The whole or part of the consideration has been written off in their account as a bad debt
• The value of supply written off is not more than the normal selling price
• The debt is at least six months old
The claim must be made within 4 years and six months from the later of the date of the supply and the due date for payment.
The trader must show VAT invoices and other records showing VAT has been accounted for and paid on supply