Your 60 second guide to VAT return adjustments on bad debt.
Debts outstanding for more than six months after the later of the date when the payment was due and payable or the date of supply require adjustment in VAT returns of both the supplier and the customer.
The customer (debtor) who failed to pay for goods or services on which input VAT had been reclaimed has six months from the later of the date the goods or services are supplied and the payment due date to repay VAT to HMRC. Below we illustrate the application of bad debt relief repayment in certain commercial scenarios from the point of view of the debtor.
If payment date has been revised If the payment due date has been extended by the supplier (more time was allowed to settle the debt) the newly agreed payment date should be taken into account.
If no invoice was issued by the supplier If supplier invoice was not issued within 14 days of goods or services delivered, the supply is deemed to have taken place before the date of invoice and the VAT tax point is the date on which the goods or services were supplied. Input VAT repayment date is 6 months from the date the goods or services were supplied.
Part payment was made Only VAT on the amount due not settled by the customer is repayable.
Business was sold as transfer of going concern If the ownership of the business changes and the new owner takes over the existing VAT registration number, the new owner will be liable to repay any VAT previously recovered in accordance with the above rules. Due diligence should identify any outstanding VAT liabilities which may be taken into account when agreeing consideration for the business.
Customer was not able to recover all input VAT Where only partial input VAT was claimed, only the amount actually recovered will need to be repaid.
Customer repays VAT on outstanding debt, but subsequently pays the supplier Input VAT is recoverable and should be included on the VAT return in the normal way. In case of businesses purchased as going concern, VAT may be only recovered if the original VAT registration number was kept by the new owner.
Business becomes insolvent If the business in insolvency received the supply prior to the date of the insolvency and the end of the six month period within which to repay the falls after the date of the insolvency, the requirement to repay the VAT does not apply, if HMRC have been property notified of the insolvency and the arrangement does not give rise to tax avoidance.
How to show in the VAT return Amount of repayable VAT should be included as negative entry in Box 4.
The supplier who previously accounted for and paid VAT to HMRC can reclaim that VAT back. A business can recover VAT paid to HMRC on supplies of goods and services if the customer has not paid and the following conditions are satisfied:
standard or reduced rate VAT was charged
VAT was accounted for to HMRC - the deduction of input tax from output tax due should be seen as, in effect, payment of that output tax
VAT amount was written off in accounts and transferred to a separate VAT bad debt account
value of the supply did not exceed ‘open market value’
debt was not transferred, sold, or factored under any legal assignment
debt remained unpaid for at least six months from the later of date of payment or date of supply of goods or services sold:
debt is unpaid if no payments have been received – for this purpose amounts received from guarantors and third parties, including non-monetary amounts, debt write offs, enforceable security are considered payments.
shares transferred by debtor in a voluntary arrangement to discharge debt in full are considered a payment
in case of insured debts, the receipt of the net amount from the insurer does not impact entitlement to BDR (bad debt relief).
Repossessing goods to recover debt
If the supplier repossessed goods not paid for, the value recovered should be offset by the BDR claim unless the sale of repossessed goods is subject to VAT.
Multiple supplies and payments
In order to identify which invoices remain unpaid in case of multiple supplies made to a customer, payments received from the debtor must be allocated to the earliest supply unless the customer specified which supply they are paying for.
Reservation of title
It is possible to make a BDR claim for supplies of goods where title was reserved until goods are paid for. Reservation of title does not impact eligibility for BDR.
Hire purchase goods
There are separate rules relating to recovery of VAT on goods sold under hire purchase agreements.
Netting off where supplier owes money to customer
If the supplier also owes money to the debtor, and the parties agree that the amounts can be offset against each other (mutual debts), BDR should be claimed once the amounts have been offset.
How to claim
A BDR claim should be made by including the amounts of VAT to recovered in Box 4 of the VAT return covering the period in which the six-month rule was met. The supplier will be able to recover the amount of VAT relating to bad debt, limited to the excess of input VAT over the output VAT on debts recovered.
If a business has made a BDR claim and subsequently recovers all or part of the outstanding amount, it must repay all or part of the VAT back to HMRC and account for the amount in box 1 on the VAT return.
VAT records based on which BDR claim was made must be retained for four years from the date of the claim (unless agreed otherwise with HMRC) and be available for inspection.
If the business is no longer VAT registered, it will still be required to pay any unpaid output VAT to HMRC. However, a claim for bad debt relief can be made by using form VAT427. More details of this can be found on VAT Notice 700/18.