Dealing with unpaid invoices can be one of the most frustrating aspects of running a business. Not only are you left chasing payments, but you might also feel the sting of having paid VAT to HMRC on income you never received. The good news? HMRC allows you to reclaim VAT on bad debts under certain conditions. In this blog, we’ll walk you through everything you need to know about VAT Bad Debt Relief, from eligibility criteria to how you can claim it, helping you ease your cash flow woes.
What Is VAT Bad Debt Relief?
VAT Bad Debt Relief is a scheme that allows businesses to reclaim VAT they’ve paid on invoices that remain unpaid for more than six months after their due date. It’s designed to ensure businesses aren’t out of pocket for VAT on income they never received.
Conditions for Claiming VAT Bad Debt Relief
To qualify for relief, you must meet the following criteria:
- Unpaid for Six Months: The invoice must remain unpaid for at least six months from the due date.
- VAT Paid to HMRC: You must have already accounted for and paid the VAT on the invoice to HMRC.
- Debt Written Off: The unpaid invoice must be formally written off in your accounts as a bad debt.
How to Claim VAT Bad Debt Relief
- Write Off the Debt:
- Adjust your accounting records to reflect the unpaid invoice as a bad debt.
- Amend Your VAT Return:
- Include an adjustment on your next VAT return. The adjustment reduces your VAT liability by the amount of VAT you’re reclaiming.
- Maintain Documentation:
- Keep evidence of the unpaid invoice, proof that the VAT was paid to HMRC, and records showing the debt has been written off. This is crucial in case of an audit.
Example:
Let’s say you issued an invoice of £1,200 (including £200 VAT) to a client, and they failed to pay after six months. If you’ve already paid the £200 VAT to HMRC, you can adjust your VAT return for that period and reclaim the £200 as part of VAT Bad Debt Relief.
What Happens If the Client Pays Later?
If your customer eventually pays all or part of the outstanding amount, you’ll need to account for VAT on the payment received in the VAT period in which it is paid.
Time Limits for Claiming:
- You must claim the relief within four years and six months of the due date of the invoice.
Unpaid invoices are a hassle, but VAT Bad Debt Relief ensures you aren’t doubly penalized for them. By reclaiming VAT on bad debts, you can reduce your financial burden and protect your business’s cash flow. Don’t let unpaid invoices drag you down—act within the rules and keep your business thriving!
If you need advice or assistance with UK VAT Bad Debt Relief or any other VAT matters, please don’t hesitate to contact us at david.levy@fkgb.co.uk. We’re here to help!
