How do bad debts affect my VAT Return?

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

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.

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:

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.