Basic rules

A business can claim bad debt relief on a VAT return when the following conditions are met:

• The sales invoice in question is more than six months overdue for payment;
• The invoice has been written off in the business records and accounts I-e the customer’s sales ledger account has been credited and a bad debt expense also created; and
• Output tax must have been accounted for on the original sales invoice and declared and paid to HMRC on a VAT return
• The debt must not have been sold, factored or paid under a valid legal assignment.
Note – the latest time a claim can be made is four years and six months after the later of the time of supply (usually invoice date) or due date for payment. If an invoice is written off and bad debt relief has been claimed, then output tax must be declared on any payment subsequently received from the customer.

Example 1
Jack’s accountant is completing his year-end accounts to 31 March 2016 and identified two unpaid sales invoice that are more than six months overdue for payment:

Invoice 0104 dated 20 June 2015 – £5,000 plus VAT
Invoice 0145 dated 31 July 2015 – £2,000 plus VAT.

Jack does not use the cash accounting scheme and has accounted for output tax on both of the invoices in question according to the invoice date. He is not confident of receiving payment for either invoice (which were made on 90-day payment terms) but feels that it is too premature to write off invoice 0104. It would therefore make sense for him to reclaim £400 bad debt relief on his next VAT return in relation to invoice 0145 but he must write this invoice off in his accounts to create a bad debt expense. VAT of £400 should be claimed in Box 4 of his next return.

Note – a common error with the rules is that sometimes a business claims the relief too early by thinking that the earliest claim date is six months from the invoice date rather than due payment date. The earliest VAT return that Jack could claim bad debt relief on invoice 0145 is therefore the return that includes 30 April 2016.