VAT – Bad debt relief – An important administrative VAT point

Several years ago changes were made to the H M Revenue & Customs policy regarding recovery of output VAT paid over but which hadn’t been received within 6 months of the due date.  Relief for the output VAT can now be obtained much more easily than under the historic process whereby notification was required to the customer.

There is also a 4 years 6 months rule for claiming such bad debt relief. This timeframe is calculated from the date the payment became overdue, or if an agreement for payment is in place, the date the agreement was broken.   Once this period has passed, it will no longer be possible to reclaim the output VAT and will become a cost to that company. It is important to be aware that the time limit exists, but also for businesses to use the rules to their advantage to improve their cash flow position.

The standard rule for claiming bad debt relief on output VAT is 6 months after the later of the time payment was due to be paid and the date of the supply. To claim this relief you should include the amount of the VAT you are claiming in Box 4 of your VAT return which covers the date when you fulfil the conditions to make a claim. Any bad debt relief claimed requires a future declaration of output VAT on any subsequent amounts received.

NB: This timeframe (6 months after due date) also applies to creditors which remain unpaid where any input VAT claimed should be repaid to H M Revenue & Customs.

Disclaimer - All information in this post was correct at time of writing.