Bad debts: how to reclaim the VAT

If a customer doesn't pay you for goods or services on which you have charged VAT, and you have paid that VAT to HM Revenue & Customs (HMRC), you can get the VAT back by claiming Bad Debt Relief. This is very straightforward providing you follow the right procedures and keep accurate records. This guide explains what you need to do to reclaim VAT on bad debts.

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Reclaiming VAT when your customer doesn't pay you

If you sell VAT taxable goods or services to a customer, you have to pay the VAT element to HMRC. If your customer does not pay some or all of the amount due you can reclaim the VAT you charged and paid to HMRC but did not receive. HMRC calls this 'Bad Debt Relief'.

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When you can reclaim VAT on bad debts

You can reclaim VAT that you paid to HMRC and which you have not received from the customer. The conditions are that:

  • the debt is more than six months old and less than four years and six months old
  • you have written off the debt in your VAT accounts and transferred it to a separate bad debt account
  • the debt has not been sold or handed to a factoring company
  • you did not charge more than the normal selling price for the items

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How to claim Bad Debt Relief

If you are entitled to claim Bad Debt Relief, you add the amount of VAT you are reclaiming to the amount of VAT you are reclaiming on your purchases (input tax) and put the total figure in Box 4 of your VAT Return.

To work out how much Bad Debt Relief you can claim on a VAT inclusive balance, you need to apply the VAT fraction to the unpaid amount.

Find out how to complete a VAT Return box-by-box

Get information on calculating VAT for VAT-inclusive and VAT-exclusive prices

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Part-payments and secured or insured claims

There are various circumstances in which your customer may pay you only some of the money you are owed. In these cases, you can only reclaim the relevant VAT element as follows:

  • If you also owe money to your customer: you deduct this amount from the total VAT inclusive amount that they owe you, and claim Bad Debt Relief on the balance.
  • If you hold an enforceable security against part of the debt: you claim Bad Debt Relief on the unpaid balance.
  • If you have insurance against bad debts: you do not have to take any payment from the insurance company into account, and can still reclaim Bad Debt Relief on the amount that your customer has not paid.
  • If you receive full or part payment from a guarantor or someone else: you claim Bad Debt Relief on the unpaid amount.
  • If your customer refuses to pay the VAT charged: you claim Bad Debt Relief on the unpaid amount, treating it as a VAT inclusive balance, and applying the appropriate VAT fraction.
  • If your customer pays only part of what they owe you: if none of the other circumstances described here apply, then you claim Bad Debt Relief on the unpaid amount.

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Records you need to keep

If you want to reclaim the VAT you have paid on your bad debt you need a copy of the VAT invoice(s) on which you are claiming this Bad Debt Relief. If you didn't issue a VAT invoice, you must keep paperwork showing the relevant information.

You must also have a separate bad debt account showing:

  • the amount written off as a bad debt
  • the VAT on which you've claimed Bad Debt Relief
  • the VAT period in which you claimed relief
  • the total amount of VAT charged on each sale
  • the VAT period in which you originally paid the VAT
  • any payments received (shown separately for each invoice)
  • the name of the customer
  • the invoice date and number - or similar information - to which the debt relates

You need to keep this information for four years after you make the claim.

Get information about managing your VAT

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VAT and unreliable customers: the Cash Accounting Scheme

Some businesses tend to have a higher level of bad debts than others. If this is a problem you face, and your turnover is not more than £1.35 million, you might find it easier to account for VAT using the Cash Accounting Scheme. Using this scheme, you only pay VAT to HMRC when a customer pays you, rather than when you invoice the customer.

Get information about the Cash Accounting Scheme for VAT

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If you are paid after you claim Bad Debt Relief

If you claim Bad Debt Relief and you later receive payment or part payment, you must pay back the appropriate amount to HMRC. If you receive payment in full, you must repay the full amount of Bad Debt Relief that you claimed. If you receive part payment, you must repay the VAT element of the part payment. You calculate this amount as follows:

Amount of relief x amount of part payment / VAT-inclusive total of original invoice.

In other words, you apply the VAT fraction to the part payment.

For example, with the standard rate of VAT at 20 per cent, if you supplied a standard-rated product or service for £100 plus VAT (ie £120) you would claim £20 Bad Debt Relief. If you subsequently got £75 in part payment, you would work out the relief to repay as follows:

£20 x £75 divided by £120 = £75 / 6 = £12.50. This is the amount you must repay to HMRC.

Between 1 January 2010 and 3 January 2011 when the standard rate of VAT was 17.5 per cent, the calculation for £100 plus VAT of £17.50 (total £117.50) would be:

£17.50 x £75 divided by £117.50 = £75 x 7/47 = £11.17. This is the amount you must repay to HMRC.

How to repay Bad Debt Relief

Once you've worked out how much Bad Debt Relief to repay, you add it to the amount of VAT you are paying on your sales (output tax), and put the total in Box 1 of your VAT Return.

Find out how to complete your VAT Return box-by-box

Get information on calculating VAT for VAT-inclusive and VAT-exclusive prices

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