Within the UK VAT system there are situations that can occur where businesses will have to pay VAT to HMRC before they have been paid by their customer. This can be an absolute nightmare for cash flow within a business.
This is where bad debt relief can really help a business out. Where the business has accounted for the output VAT and paid it over to HMRC, but not yet received payment from the customer, it can claim a reimbursement for the outstanding amount. Small businesses really ought to be utilising this as they could be out of pocket for no good reason.
There are of course some conditions for bad debt relief to be able to apply to a business and to make it as easy as possible for you we have listed these conditions below.
- Commodities or services have actually been supplied.
- The output tax for those commodities or services in question has been accounted for in your books and records.
- Payment of the VAT has been made to HMRC.
- 6 months has passed since the later of the date of supply of the goods or services and the due date for payment.
- Ensure that the outstanding amount has been written off in the accounting records appropriately.
If your business meets the requirements then it could well be that you are entitled to bad debt relief and this means you then need to make the claim.
Making the claim is not a huge task and it is in many respects relatively straight forward. On the VAT return form you need to enter the amount you wish to claim back into Box number 4 (as input tax) as if it were a purchase for the business.
It should be noted that any business wishing to make a claim must keep the relevant records for at least 4 years from the date of the claim to convey the above points to HMRC.
It is important to ensure you claim it as a bad debt and record it as such within your accounting records rather than issue a credit note. A credit note is only acceptable if there is a genuine change in the consideration of the supply. In addition, you want to notify that it is a bad debt as opposed to reversing the service/ commodity.
After a claim has been made the business should ensure that it keeps a track of any of these debtors if they pay up as the output tax would then need to be paid over accordingly.
For further information or advice on how to claim these within your accounting system please contact PAH Accounting and we will be only too happy to help.