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How do bad debts affect my VAT Return?

What happens if you pay VAT to HMRC but never receive the VAT back from your client? You may be able to reclaim the VAT. Here’s how. 

What is a bad debt?

A bad debt is an amount which is owed by a customer to the business that is unlikely ever to be paid.

Can I reclaim VAT on bad debts?

VAT on bad debts can be reclaimed once the debt is over six months old (from the date the payment was due) and is less than four years and six months old.

In order to reclaim you must have:

  • Paid the VAT over to HMRC, and
  • Written off the debt in your accounts.

Bad debts may or may not affect your VAT return depending on what type of VAT scheme  you use.

Many small businesses operate the cash accounting scheme and under this scheme there is no adjustment for bad debts, as the VAT has not been paid over to HM Revenue and Customs (HMRC) in the first place.

 

How do I reclaim VAT on bad debts?

This is an extract of the boxes from the VAT return that you will be asked to complete when you submit your VAT return online:

Box to be completedExample of extract from tax returnComments
Box 1 – This shows the total output VAT for a three month period. The amount which is to be reclaimed will have been included here in a previous return. The bad debt claim is not included in this box. VAT due in this period on sales and other outputs (Box 1): £2,860.73In this example the total output VAT for the period is £2,860.73.
Box 4 – This is the amount of VAT reclaimed from purchases and other expenses (input VAT). If a bad debt claim is being made include it in this box. VAT reclaimed in this period on purchases and other inputs (including acquisitions from the EC) (Box 4): £1,567.31In the example shown the total input VAT claimed on purchases and other expenses is £1,442.59 and a bad debt claim of £124.72* has been made. The two amounts are added together and included in this box. *This is the VAT element of a total bad debt of £748.32 (£623.60 net + £124.72 VAT).

 

Quiz: Do you understand VAT and bad debts?

What happens if the customer pays the outstanding debt?

If you have made a claim and you subsequently receive the payment at a later date, you must refund the amount to HMRC via your VAT return.

Checklist: What records do I have to keep?

When you reclaim the VAT on a bad debt the following records must be kept for four years from the date of the claim. Login to save this checklist to your profile for future use – as you work through the list, any checkboxes that are ticked or unticked will be automatically saved to your profile. (To register to join and enjoy the benefits of membership click on the link at the top right of the page. It will only take a few minutes to create your profile).

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