VAT and bad debts
VAT and bad debts
Q: We have recently had problems with customers not paying. How can we protect ourselves against bad debts?
A: Using the cash accounting scheme to account for VAT is an effective way to protect against the VAT effects of bad debts. Under this scheme, you only pay VAT (output tax) to HMRC when a customer has paid you, rather than when you invoice the customer.
If you're not using cash accounting and a customer fails to pay you for goods or services then you can still reclaim the VAT you charged and paid to HMRC. This is called 'bad debt relief'.
Making the claim is fairly straightforward, providing you keep accurate records. The following conditions must be met before a claim can be made:
- The debt is more than six months old and less than three 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.
The claim is then made by including the amount of the refund on Box 4 of the VAT return for the period in which the debt became more than six months old.
Call us for more details or visit the HMRC website for its guidelines.