Reclaiming VAT on unpaid debts
NC writes: In finalising my company accounts for the last year, my accountant has encouraged me to do a detailed review of money we are owed. This has resulted in a higher than usual provision for amounts that might not be received. Can I use this provision to reclaim Vat?
You can reclaim Vat that you paid to HM Revenue & Customs on debts that have not been paid by customers, writes Adrian Houstoun, Vat partner at Kingston Smith LLP. If you have received part payment, you can reclaim only the proportion of Vat outstanding.
However, the conditions are different from those your accountant will use for the purposes of the accounts. To claim the Vat relief, the debt must be between six months and three and a half years old, and you must have written off the debt in your Vat accounts and transferred it to a separate bad-debt account. You may not claim relief if the debt has been sold or handed to a factoring company or if you charged more than the normal selling price for the items.
To make the claim, add it to the input tax amount in box 4 on your Vat return. To support the claim you will need detailed records going back four years. If you claim bad-debt relief and later receive payment or part payment, you must pay back the appropriate amount to HMRC.
If your turnover is £1.35m or less, you might find it easier to account for Vat using the Cash Accounting Scheme. This may help your cashflow because you only pay Vat to HMRC when a customer pays you, rather than when you invoice the customer.
Don’t forget that there is a flip side to this: bad-debt relief for your trade creditors. If you have outstanding creditors over six months, you must repay the input tax you have claimed.