Claiming bad debt relief

If your customer doesn't pay up, you can claim the unpaid VAT from HMRC as bad debt relief (BDR) . What must you get right to ensure you get maximum relief?


When can you claim? You can claim BDR for VAT you have charged your customers if it remains  unpaid six months after the due date. You must make the claim within 4 1/2 years of issuing the invoice.


How do you claim? You will need to keep a "bad debts" account within your book-keeping system. You make the claim by adding the refund to the input tax claimed in Box 4 of the VAT return.


You do not reduce the output tax due in Box 1.


Tip Although the debt has been written off in the BDR account, this is only for VAT purposes. You can still continue to pursue the debt in full.


How much can you claim? You can claim the output tax originally charged. It's irrelevant if the VAT rate has subsequently changed. Similarly, you pay VAT at the original rate, not the rate applicable when payment is received. 


If your customer has made payments on account, you can only claim for the VAT included in the outstanding balance.


The amount of bad debt relief is normally the VAT fraction of the outstanding amount. However, the Upper Tribunal has held that in very limited circumstances relief may be given for the entire unpaid sum.

The appellant was a firm of solicitors. It supplied services in connection with insurance claims. In compliance with an agreement between HMRC and the insurance industry, it issued VAT-only invoices to VAT-registered insured parties (the main charge being invoiced to the insurer). The Upper Tribunal decided that any amount of such VAT-only invoices which remained unpaid after six months was available in full for bad debt relief. (Simpson and Marwick v HMRC [2011] UKUT 498 (TCC)) - viewable here .