INS12601 - VAT Schemes
VAT Bad Debt Relief
General
What are the conditions for claiming relief?
How to claim
Part payments
Casework procedure
Examples
General
Relief from VAT on bad debts is allowed by section 36 of the VAT Act 1994 and Part XIX SI1995/2518 of the VAT Regulations 1995.
The relief scheme is explained in Notice 700/18 ’Relief from VAT on Bad Debts’ and in guidance under VBDR. All of the preceding should be consulted in conjunction with these instructions.
The following instructions only relate to supplies made on or after 1 April 1989. The insolvency based scheme which existed before then was closed in law in 1997 after a 7 year transitional period, so it is not possible for belated claims under the old scheme to be made.
What are the conditions for claiming relief?
The conditions for claiming relief are set out in Bad Debt Relief guidance at VBDR1500.
One of the conditions listed in the above guidance is that the claimant must have already accounted for and paid the tax being claimed, via a VAT return or assessment. Many traders under control of NIU will fail to satisfy this condition because returns have not been rendered or paid and so it is important that caseworkers establish in which periods the supplies for which relief is claimed were made. If a repayment return is received for any period, tax for that period is deemed to have been paid. See also Revenue & Customs Brief 18/09, which explains that payment will be taken to have been made to the extent that output tax is covered by deductible input tax.
Time limits
The time limits for claiming relief are set out in Bad Debt Relief guidance at VBDR1600.
How to claim
The trader can claim any entitlement to relief as soon as the debt is over six months old.
If the IP submits the BDR on a VAT return they should include the amount of relief due in the total amount of input tax shown on the VAT return. If the trader has been deregistered then the Bad Debt Relief claim should be made on form VAT 426.
Part payments
If a return for a period in which Bad Debt Relief is claimed has been part paid then the trader is only entitled to a refund of the VAT relating to the amount that has been paid, but also refer to Revenue & Customs Brief 18/09 above.
Casework procedure
Where a claim for Bad Debt Relief comes to light the caseworker should establish which periods the claim for relief fall in. Therefore, a schedule and copies of all invoices must be requested from the IP to support the claim.
Once it is clear in which periods the claim for Bad Debt Relief falls, the caseworker should access VISION (OL page) to ascertain whether a return has been received for the relevant period(s) and if so whether the tax has been paid or part paid (but also refer to Revenue & Customs Brief 18/09 above). If the tax has been paid or part paid then the refund is allowable, (see examples below).
In cases that require closer scrutiny e.g. large claims or claims made by suspect IPs further enquiries should be made in writing to ensure that all the conditions for entitlement to relief are satisfied as set out in VBDR1500 under ‘What are the conditions for claiming relief’ above.
Examples
Example 1
| Period | 03/10 | 06/10 | 09/10 |
| Output tax | £200,000 | £250,000 | £225,000 |
| Input tax | £110,000 | £112,000 | £111,000 |
| BDR (in Box 4) | £30,000* | ||
| Net tax due | £90,000 | £138,000 | £104,000 |
| Tax paid | Nil | Nil | Nil |
Allowable BDR in period 09/08 is £30,000 calculated as follows:
-
- VAT related to bad debts on supplies made in period 03/08 - £120,000
- Less unpaid net tax due in period 03/08 - £90,000
- Maximum 03/08 bad debts available for relief 6 months later in period 09/08 - £30,000
- The amount of 03/08 BDR reclaimable in 09/08 has been restricted to the excess of input tax over output tax due on non-bad debt supplies, i.e. £110,000 input tax - £80,000 output tax.
Example 2
| Period | 03/11 | 06/11 | 09/11 |
| Output tax | £200,000 | £250,000 | £225,000 |
| Input tax | £110,000 | £112,000 | £111,000 |
| BDR (in Box 4) | £50,000 | ||
| Net tax due | £90,000 | £138,000 | £84,000 |
| Tax paid | £20,000 | Nil | Nil |
Allowable BDR claim in 09/11 is £50,000 calculated as follows:
-
- VAT related to Bad debts on supplies made in period 03/11 - £120,000
- Less unpaid net tax in period 03/11 - £70,000
- Maximum 03/11 bad debts available for relief 6 months later in period 09/11- £50,000
- The amount of 03/11 BDR reclaimable in 09/11 has been restricted to the excess of input tax over output tax due on non-bad debt supplies, i.e. £110,000 input tax less £60,000 output tax due on non-bad debt supplies (£80,000 less the £20,000 payment made).
