Can I Claim VAT Back On Unpaid Invoices?
Business owners are responsible for paying VAT on sales of goods and services. If you have unpaid invoices, then you may be able to claim bad debt relief from HMRC. This is a form of tax relief that allows businesses to reclaim some or all of the VAT they’ve paid when their customers haven’t paid them for the goods or services purchased. In this article, we’ll look at what is a bad debt relief scheme and how it can help your business’s cash flow problems by giving back money that was previously spent on VAT.
VAT can be a daunting topic for business owners, that’s why we’ve put together this article to help you understand claiming VAT back on unpaid invoices. We have a library of articles aimed at supporting business owners just like you when it comes to accounting and bookkeeping. Check out our accounting blog for business owners just like you.
So, how do you deal with bad debts and VAT? Let’s dive in.
What is VAT bad debt relief scheme?
You can claim relief from VAT on bad debts if you have made supplies to your customers and have not yet been paid. You’ll be able to claim relief from the VAT on bad debts for the goods or services that you’ve supplied as long as you meet all the conditions – these are explained later in the article.
When can you claim VAT back using a bad debt relief scheme?
To claim the VAT back using a bad debt relief scheme, the debt must be at least 6 months old. This is counted from the later of:
➡️The date the payment was due
➡️The supply date
You can check your credit terms or any agreements with your client to establish when the payment was due.
You can’t claim the relief before the supply meets this 6-month rule. Let’s say the invoice qualifies for a bad debt relief on 5th April 2023 and your VAT returns are the same as calendar quarters. This relief can be claimed earliest in the VAT quarter Apr-Jun 2023. You can’t claim it in Jan-Mar 2023.
You also have to make sure you claim the relief within 4 years and 6 months of the latter of (this is only for the supplies made after 30 April 1997):
➡️The date the payment was due and payable
➡️The supply date
*It’s important to know that if you use a VAT cash accounting scheme, you’ll be entitled to automatic relief, so you won’t need to claim bad debt relief. The reason for this is that in the VAT cash accounting scheme you pay VAT to HMRC on your sales only when you receive the actual payment (hence the cash scheme). If you haven’t been paid, you haven’t paid VAT to HMRC, so there’s nothing to claim back from HMRC.
What conditions do you need to meet to claim bad debt relief?
The conditions you must meet in order to claim relief from VAT on bad debts are:
✅You must have already included the sale in your VAT return and paid the VAT to HMRC. If you haven’t invoiced the client yet, there’s no debt yet and no relief can be claimed. Remember- with the bad debt relief you’re claiming back what you had paid to HMRC.
✅You must already have written off the debt in your accounts. This means you have a separate account for bad debts and this debt is shown there.
✅The value of the supply must reflect its value and how it’s perceived by buyers (it’s called customary price).
✅The bad debt must not have been paid or sold.
✅The bad debt meets the condition of being 6 months overdue at least as explained earlier in the article.
✅Your customer is the owner of the goods; this applies to supplies made before 19 March 1997.
✅You don’t need to notify your customer that their debt has been written off unless this is for the supplies made between 26 November 1996 and 30 April 1997 and your customer is VAT registered.
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How can you claim VAT via bad debt relief?
As previously mentioned, the VAT bad debt relief scheme is a way to get some of the money you’ve lost back from HMRC. You’ll be pleased to know that claiming the bad debt relief doesn’t require any special forms and it’s quite straightforward.
To make a claim you’ll need to include the amount of the VAT you’re claiming in box number 4 of your VAT Return. You do this as a part of your normal VAT return and you can do it as soon as you meet all the conditions for making the claim. (Remember, now Making Tax Digital for VAT is mandatory for all VAT registered businesses!)
Records you must keep
You always have to make sure you keep all business records as this is a legal requirement. There are no exceptions when claiming bad debt relief. Make sure you keep a copy of the VAT invoices for the supplies on which you’re claiming a refund, plus a separate bad debt account in your accounts as mentioned earlier. It has to be super clear from the records what you’re claiming the relief on, what customer it is, the amount you’re claiming and HMRC can’t have any doubts you met all the conditions.
Accounting software like Xero makes it super easy for claiming the bad debt relief and it also gives you a great audit trail, so you can have all the details you need in one place..
And what if you never issued the original invoice? You must have other evidence to show you sold the service or a product and paid VAT from it to HMRC.
And have you considered implementing some solutions to minimise situations when clients don’t pay you?
The world of VAT can be tricky at times, that’s why at Joanna Bookkeeping we can help support your business by explaining exactly what VAT is, and how it affects you as a business when it comes to topics like claiming VAT back on unpaid invoices.
If you want to avoid getting stuck in red tape and make sure everything is done correctly from the beginning and beyond, let us show you how! Get in touch with us to see how our Oxford-based accountancy and bookkeeping team can help.
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Frequently Asked Questions
First you have to make sure you accounted for the sale in your VAT return and paid VAT to HMRC. Nex, establish if the debt meets a condition of being at least 6 months old. You have to then transfer the debt to a separate account in your accounts to write it off. It means having an account in your Profit and Loss called Bad debt or Irrecoverable debt or something similar. You can then claim the VAT back in your normal VAT return.
You can write off bad debt and use a bad debt relief when a debt is at least 6 months old. This is either form the date when the debt was due or the supply date, whichever is later. You can assess this by looking at your agreement with the client, for example, in your terms and conditions document.
No. The VAT cash accounting scheme provides an automatic relief for bad debts. The reason for this is that with this scheme you pay and claim VAT on the actual payments received and made. If you haven’t received a payment from your client, you haven’t paid VAT to HMRC. In this case there’s nothing to claim back.
Claiming bad debt relief has its time limit. If you want to recover the money from HMRC, you need to make sure you claim the bad debt relief within 4 years and 6 months from the date you made the supply or from when the debt was due, whichever is later.
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