Chapter 12 - Bad Debt Relief

Question 1

The Problem

Answer 1

Where traders don’t settle invoices promptly, the circular nature of input and output VAT being settled is broken.

Question 2

Bad Debt Relief

Answer 2

Available to traders where the following is met:
- they have supplied goods or services and have account for and paid the output tax to HMRC
- all or part of the consideration is written off in the accounts as bad debt
- the value of the supply being written off must no be more than the normal selling price
- the debt itself must not have been paid or sold on
- the debt must be at least six months old
The amount of VAT claimed as bad debt relief is added to the input tax figure and put in Box 4 of the VAT100

Question 3

Claim Timeframe

Answer 3

Must be made within 4 years and 6 months from the later of the:

• date of supply
• due date for payment on the invoice

Question 4

Records and Notifications

Answer 4

Before making a claim, claimant must hold VAT invoices and other records showing VAT has been accounted for and paid on supply and that it’s been written off as bad debt in the accounts.

Question 5

Part Payments

Answer 5

Traders often pay sums on account. Unless purchaser identifies the payment as relating to a particular invoice, and that invoice is settled in full, the general rule is that cash received is allocated to the older invoices first

Question 6

Payment After Bad Debt Relief Claim

Answer 6

If a claim is made by a trader and they later receive payment or part payment in respect of the bad debt, the appropriate amount of VAT must be paid back to HMRC.
If part payment, the amount to pay back is calculated as:
Relief x part-payment/VAT inclusive total of original invoice