BIM31575 - VAT: irrecoverable sums

Most traders have to account for VAT at the time of supply and it cannot be waived on the grounds that the trader has not received payment from his customers. The exception being small traders (those with a VAT exclusive turnover not exceeding £350,000) who may opt to account for VAT on their sales on a cash received basis. From 1 April 1989, the rules whereby a trader can reclaim VAT on bad debts were changed significantly.

For taxable supplies made before 1 April 1989, Section 22, Value Added Tax Act 1983 permitted a trader to claim a refund of VAT only where the debtor had become legally insolvent. Any VAT that remained irrecoverable should be treated as part of the total debt from the customer. It should be allowed for Case I purposes as a bad or doubtful debt if, and to the same extent as, the VAT exclusive debt is allowable in the normal way.

For taxable supplies made on or after 1 April 1989, Section 36, Value Added Tax Act 1994 permits a trader to claim a refund of VAT where:

• he has accounted for and paid VAT on the supply,

and

• the whole or any part of the consideration for the supply has been written off in his accounts as a bad debt,

and

• a period of six months has elapsed since the date of the supply.

A deduction in respect of such a bad or doubtful debt should therefore be restricted to take account of the fact that any VAT included is likely to be recoverable, unless the trader can demonstrate that this is not so.