Get your VAT back on debts

It's bad news if a customer can't or won't pay, and where you've already handed over VAT on the sale to the Taxman it adds insult to injury. Of course, you'll get the VAT back if the debt goes completely bad, but how long do you have to wait and could you avoid paying it in the first place?

Paying VAT on sales

VAT due on sales is usually accounted for on the return covering the date of issue of the sales invoice. If a customer fails to pay that will leave your business out of pocket. However, at least you can reclaim the related VAT you have paid.

Basic rules

You can reclaim VAT on an unpaid sales invoice if all the following conditions are met:

the VAT has been included on an earlier VAT return
the debt in question is more than six months overdue for payment
the invoice(s) have been written off as bad debts in your business accounts

Assuming the conditions are met, you can recover the VAT originally paid by adjusting your next return. You should add the VAT element of the bad debt to the input tax figure in Box 4.

Tip. The VAT you can reclaim is the amount you charged on the original sales invoice.

Tip. Bad debt relief can be obtained automatically by adopting the cash accounting scheme. Normally you would have to pay the Taxman the VAT on any invoice you issue whether or not it has been paid. The cash accounting scheme allows you to defer handing over the VAT until you have been paid by your customer.

Unexpected payment

If you have claimed back VAT using the bad debt relief rules, but subsequently receive a payment from your customer, you should treat the payment received as VAT inclusive. You must repay the bad debt relief to HMRC on the return that covers the payment date.

Example. If you receive a payment of £1,200 against an original debt of £4,700 (£4,000 plus VAT at 20% of £800) previously treated as wholly bad, you must pay back VAT of £200, i.e. £1,000 at 20% VAT.

The bad debt relief rules work both ways. So if you have reclaimed VAT (input tax) on a purchase invoice which is more than six months overdue, you must repay the VAT you have claimed on this invoice by adjusting the entry in Box 4 of your next return. However, when you do eventually pay your supplier, you can again claim the VAT as input tax in the usual way.

If you need any more information on VAT or on any other tax issues, please get in touch with us on 0191 386 4786 or by emailing information@westwaters.com

Get your VAT back on debts

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