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VAT - bad debt relief

In these difficult economic times, it is easy to forget that good housekeeping can improve VAT cash flow. If debtors are increasing and cash flow is an issue, it is easy to overlook the bad debt relief which is available.

If you have debtors of more than six months old, you can adjust the VAT already paid to HMRC, subject to certain conditions.

The main conditions are:

  • The VAT has been paid to HMRC
  • The debt has been written off in the accounts (eg refund for VAT bad debts account which can be outside of the main accounts)
  • The debt is more than six months old (later of time of supply and due date for payment).

Claims are made by including the VAT on the outstanding amount in the VAT return for the period when entitlement arises. The VAT is adjusted by including it in Box 4 of the return.

In the event that the debt is subsequently paid by the customer, the VAT claimed under these rules, will have to be repaid to HMRC.

Claims must be made within four years (from 1 April 2009) and six months from the later of:

  • Date of the supply; and
  • The date the amount became due and payable.

But you should not forget that if you have unpaid supplier invoices which are more than six months old (excluding any time allowed for payment), you are required to repay the VAT claimed on your VAT return. You adjust for this by entering a negative figure in Box 4 of the VAT return in the period in which the six month period has passed.

Another way to mitigate VAT debts is to consider whether you can use the Cash Accounting Scheme. Businesses with an annual turnover of less than £1.35 million and with a good VAT compliance history can use the scheme. Under the scheme, VAT is accounted for on a cash receipts basis rather than on an invoice basis. This provides automatic bad debt relief.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

Jane Stacey is a VAT Manager at Mercer & Hole.



Date: 22nd July, 2009
Author: Jane Stacey


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