Are You Entitled to Bad Debt Relief?

The news that Carillion has gone into liquidation, although not wholly surprising given recent press coverage, has still sent shock waves around the Small/Medium business community, potentially leaving many SMEs out of pocket or even worse depending on their exposure to Carillion.

Businesses can at least obtain VAT bad debt relief on amounts owed to them by debtors under certain circumstances. These are as follows:-

1. You must already have accounted for the VAT on the supplies and paid it to HM Revenue and Customs.

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.

4. The debt must not have been paid, sold or factored under a valid legal assignment.

5. The debt must have remained unpaid for a period of six months after the later of the time payment was due and payable and the date of the supply.

You can reclaim the VAT accounted for on the VAT return that covers the time that the transaction becomes eligible for Bad Debt Relief.  So, for example, if you raised an invoice in June 2017 that was payable in July 2017 and is not paid by January 2018, the bad debt relief becomes available in January 2018. This would be claimable in the next VAT return. This will depend on when your returns fall due.

You claim this on your VAT return by adding the amount to box 4 of the return as if it were input tax rather than treating it as a credit to box 1.

There is a sting in the tail or more accurately 2 stings in the tail with VAT adjustments for Bad Debt relief.

  1. If you do not pay your supplier for 6 months after the date of supply or if later than the due date for payment then you should adjust the input tax accordingly
  2. If you are fortunate enough to subsequently receive a payment, whether partial or in full, then VAT must be accounted for on this payment.

If you have any questions or think you maybe eligible for Bad Debt Relief, get in touch and contact Stephen.

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