Can I Claim VAT Relief on Bad Debt?

Finally resigning yourself to writing off a bad debt can be a wrench. Not being paid for the hard work you have put into providing your goods or services can feel unfair and unjustified. But, did you know that if you’re a VAT registered business then you can claim back the VAT that you have paid in respect of the bad debt in question?


However, there are a number of conditions that will apply if you are looking to reclaim VAT and the process will be different depending on how your business conducts its accounting activities. We’ll take you through those conditions and processes now.


How Long Do I Have To Reclaim VAT?

The time limits that apply to reclaiming VAT on a bad debt are currently 4 years and six months after the final due date of the original invoice or the date of the supply of goods or services (whichever is later). So, in respect of an invoice, if your payment terms are thirty days then you will have 4 years and six months to reclaim VAT that you have paid in respect of the unpaid invoice after the thirty days have expired. There are other rules that apply specifically for bad debt dating back to 1st April 1989 – 30th April 1997 and more can be found on this here.


What Conditions Apply That Will Allow A Reclaim of VAT?

To be eligible for reclaiming VAT on a bad debt, the following conditions must apply:

  1. You must have already accounted for the VAT and made a payment to HMRC.
  2. You must have written off the debt in your day to day VAT accounts and transferred it to a separate bad debt account.
  3. The value of the supply must not be more than the customary selling price, i.e. the value of the goods or service was market value and not excessive.
  4. The debt must not have been paid or sold on.
  5. At least six months have passed since the date of the supply of the goods or services.


My Business Operates With Standard Accounting Practices, How Do I Reclaim VAT?

If your business operates with standard accounting procedures in place then you will pay VAT and reclaim VAT at the time of the supply of goods and services. This means that your VAT is due at the time of your invoice date, not when a payment has been made to clear an invoice. When completing your VAT return and reclaiming VAT on a bad debt that meets the criteria above, the VAT element is added to Box 4 and the invoice net amount is added to Box 7. You can also do this for invoices that have been partly settled.


My Business Operates With Cash Accounting Practices, How Do I Reclaim VAT?

Due to the nature of cash accounting principles, there will be no need to reclaim VAT on a bad debt. VAT is only declared once monies have been received for an invoice and therefore your business would not have already paid the VAT for a bad debt to HMRC.


You can also reclaim VAT on bad debts if you operate on a Flat Rate or VAT Margin scheme but we would recommend that you consult an accountant in these situations to determine the correct course of action.


Is There Anything Else I Need To Know?

You can still reclaim the VAT on a bad debt even if your business has subsequently deregistered for VAT. You must keep records of the original VAT invoices as well as a separate bad debt account – details of this can be found here.


What If I Want To Recover The Full Bad Debt?

Before you consider writing off any bad debt and attempting to reclaim any eligible VAT, we strongly recommend contacting a member of our team of debt recovery experts. We are able to attempt to recover bad debt that has been outstanding for six years or less and we have a proven track record of success. You can view our client testimonials here. We work on a no collection, no fee basis so there is nothing to lose. Wouldn’t it be great if you could recover the full amount of an unpaid invoice, instead of just the VAT element? Get in contact today to see how we can help

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