What is bad debt relief for VAT?

Question

Accepted Answer

Here is a comprehensive explanation of VAT bad debt relief in the UK.

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## What the law says

**The statutory basis** is **VATA 1994, section 36**. It provides that where:
- (a) a person has **supplied goods or services** and has **accounted for and paid VAT** on the supply,
- (b) the whole or any part of the consideration has been **written off in his accounts as a bad debt**, and
- (c) a period of **6 months** (beginning with the date of the supply) has elapsed,

...the person is entitled, on making a claim to HMRC, to a **refund of the amount of VAT chargeable by reference to the outstanding amount**.

**The "outstanding amount"** is the consideration written off, less any part of it already received at the time of the claim.

A further condition is that the **value of the supply must be equal to or less than its open market value**.

**Regulations** may require claims to be made in a specified form, evidenced by records, and may require repayment of a refund if the debt is subsequently recovered. Regulations may also deal with special cases such as mutual debts and part-payments. The governing regulations are **Parts XIX, XIXA and XIXB of the VAT Regulations 1995**.

**The mirror obligation on the customer** is found in **VATA 1994, section 26A**: where a customer has claimed input tax credit but the consideration remains **unpaid 6 months after the relevant date** (the date of supply or, if later, the date the sum became payable), the customer is treated as **never having been entitled** to that input tax credit and must repay it.

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## HMRC guidance / practice

**The governing notice** is **VAT Notice 700/18** (*Relief from VAT on bad debts*).

**How to claim:** Claims for bad debt relief should be made on the **VAT return for the accounting period in which the entitlement arises**, included in the **input tax claim box**.

**Records you must keep** include:
- A copy of the VAT invoices for the relevant supplies
- A separate **bad debt account** showing: the amount written off, the VAT claimed, the VAT period of the claim, the total VAT charged, the VAT period when VAT was originally accounted for, payments received, the customer's name, and invoice details

**Mutual debts:** Where you also owe money to the debtor, the debt is reduced by the amount you owe before calculating the VAT fraction. For example, on a supply of £720 (£600 + £120 VAT) where you owe the debtor £115, the claimable relief is: (£720 − £115) × 1/6 = **£100.83**.

**Margin Schemes:** Bad debt relief is capped at the **VAT fraction of the profit margin** (not the full selling price), since that is the maximum VAT paid to HMRC. If the debt is less than the margin, relief is the VAT fraction of the debt; if the debt exceeds the margin, relief is limited to the VAT fraction of the margin.

**Cash Accounting Scheme:** Users of the Cash Accounting Scheme do not need to claim bad debt relief while in the scheme (since VAT is only accounted for on receipt). If they leave the scheme, they may then claim bad debt relief on unpaid supplies, subject to the standard conditions.

**Time limit:** There is an overall time limit of **4 years and 6 months** within which a claim must be made.

**Recovery of relief:** If payment is subsequently received after bad debt relief has been claimed, the supplier must repay a proportionate amount of the relief to HMRC.

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### Summary

In short, VAT bad debt relief allows a VAT-registered supplier who has paid VAT to HMRC on a supply but has not been paid by their customer to **reclaim that VAT** once the debt is 6 months old and has been written off. The customer correspondingly loses their input tax credit on the unpaid amount.

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