VAT Relief for Bad Debt: What to Know

Managing VAT can be challenging, especially if your customers aren’t paying their bills on time. You’re still required to pay HMRC for the VAT you’ve charged these customers and to complete a VAT return with their invoices, but you may not have funds set aside to cover these unexpected VAT expenses.

This cycle of poor customer payments alongside your VAT obligations is known as VAT bad debt. This applies whether the customer is late on payment or is unlikely ever to pay you – in both instances, you are paying for VAT you’ve charged but not been paid for.

As a business owner, having to set aside VAT you’ve not been paid by your customers can really affect your bottom line and your cash flow.

You will likely encounter VAT bad debt at least once in your business career, so you need to know how to navigate this issue with HMRC, how to apply for VAT bad debt relief, and what processes you can follow to get back some of the money you’ve lost.

Eligibility Criteria for VAT Bad Debt Relief

You need to meet several key criteria to ensure you are eligible for VAT bad debt relief.

Understanding Qualifying Debts

To qualify for VAT bad debt relief, you must meet the following criteria:

• You have supplied goods or services to a customer and were not paid, and you already paid for the VAT on these goods or services to HMRC.
• You must claim your VAT bad debt relief within four years and six months from the date the payment was due or from the date of supply, depending on which was the latest. However, according to HMRC, if you provided supplies between 01 April 1989 and 30 April 1997, you can still claim relief within specific conditions.
• You must have written off the debt in your VAT accounts and moved it to a bad debt account.  The due date for the payment of this debt can be managed between you and the customer, but if this fails, you are eligible for VAT bad debt relief.
• You cannot charge more than the customary selling price, and the debt must not have been sold, paid, or factored under legal assignment.
• You have not been paid for the VAT or the services and products for six months after the latest payment date due.

Documentation and Compliance Requirements

You can claim your VAT bad debt refund if you meet the eligibility criteria, but you also need to maintain meticulous records to ensure you remain compliant with HMRC guidelines.

Keep a copy of the VAT invoice(s) on which you are claiming the refund or show documentation that has the same information if you do not have an invoice.

Proof of your bad debt account, which shows the amount that has been written off, the amount of VAT you wish to claim, the VAT period, the total amount of VAT charged, the VAT period in which you originally paid the VAT, the payment received, the name of the customer, and a copy of any notice issued to the customer.

How to Claim VAT Bad Debt Relief

Follow the steps below to claim VAT bad debt relief.

Step-by-Step Application Process

Step 1: Write off the debt in your VAT accounts and move it to a bad debt account, and ensure you keep meticulous paperwork so you can provide this to HMRC as per above.

Step 2: Log into your VAT online portal to submit the claim. Remember, you cannot claim on a return for an accounting period before the one where you are eligible for relief.

Step 3: Navigate to Box 04 of your VAT return to fill in the amount of VAT you’re claiming and complete the various questions and requirements asked of you in this section.

Step 4: You must inform your customer that you’ve made this claim within seven days of completing the online form. They need to receive a written notice that shows the date of issue, the date you claimed your VAT bad debt relief, the date and number of the VAT invoices applicable to the claim, the VAT amount for each item that is being written off, and the total amount of the claim.

Step 5: Keep all this paperwork stored in an accessible space for up to four years from the date of the claim.

Common Mistakes to Avoid

There are several vital things you must ensure you manage closely when applying for VAT bad debt relief:

If the customer pays you after you’ve made a VAT bad debt relief claim, you must refund HMRC. You can do so using your VAT return. Failure to do this could result in hefty fines and the risk of fraud.

Remember: You must keep the records for four years, and HMRC may ask for them at any time, so don’t make the mistake of throwing them away. Keep everything digitally and as accessible and well-labelled as possible.

Impact of VAT Bad Debt Relief on Business Finances

When you’re dealing with VAT bad debt, your business has to absorb the cost of the VAT, which can have a direct and immediate impact on your cash flow. If you stay on top of these debts and ensure you claim back from HMRC correctly, you can minimise this impact over the long term.

Navigating Complex VAT Regulations

Managing VAT bad debt relief can be daunting as there is a lot of paperwork and complex regulations and requirements.  

Seeking Professional Advice

Consult financial experts or tax advisors for support and guidance in complex situations such as VAT bad debt relief. Not only will this ensure you get professional, relevant advice to help you manage your business finances and cash flow, but you will also stay on top of HMRC guidelines and requirements throughout the process. There is no need for you to feel lost, confused or frustrated by VAT bad debt as you can use these services to smooth over the bumps and help you stay on track.

Updates and Changes in VAT Policies

Another reason a professional organisation can be an invaluable ally is to help you regularly stay on top of VAT policy changes. It’s not your role to be a VAT specialist – you want to run a successful business – so using a trusted VAT specialist service will ensure you remain ahead of changes or unexpected shifts in legislation that could potentially affect your business.

Maximizing Benefits from VAT Bad Debt Relief

VAT bad debt can be a particularly stressful scenario to manage. It can be frustrating to chase the customer for payment, and even more aggravating to pay VAT for something that has not been paid to you. However, by following these simple steps, you can claim the VAT back and revitalise your cash flow relatively easily.

For cross-border enterprises, it’s critical to have an automated and digital process in place that gives you complete visibility of all your employee-driven transactions so that you have full control over your VAT payments and can stay ahead of all regulations, changes, and VAT bad debt relief applications.

Blue dot is the world’s leading AI-driven expense analysis platform can help you simplify VAT management by delivering a transparent and precise end-to-end transactional story for every employee-driven expense. Our VATBox solution makes VAT management effortless, and our online VAT Reclaim Calculator takes easy and accessible VAT visibility to a whole new level!