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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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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'.
You can reclaim VAT that you paid to HMRC and which you have not received from the customer. The conditions are that:
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.
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 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:
You need to keep this information for four years after you make the claim.
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.
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.
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.