Claiming VAT on bad debts
It is an unfortunate fact that bad debts are a feature of economic recessions.
However, one positive point is that you can reclaim the VAT element of any unpaid sales invoices provided the output VAT has already been included on a VAT return – as long as certain conditions are met:
The debt must be at least six months overdue for payment. In the case of an invoice raised on 30-day payment terms, the debt will qualify for relief seven months after the date of the invoice.
The debt must be written off in your accounting records, ie the customer’s ledger is credited and a bad debt account created.
The debt has not been sold to a factoring company.
If all the conditions are met, you can reclaim the VAT element of the debt within Box 4 of your next return.
Another option is to use HMRC’s cash accounting scheme where you do not account for VAT until you receive payment from your customer. This gives automatic bad debt relief – contact us to see if you are eligible to use the scheme.