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 .
With more people now working from home, the question of what can be done with the VAT on the conversion costs is a common issue. What are the rules, and how can you go about reclaiming that VAT?
Example The Managing Director of a company, Mr P, works from home a lot, and is considering having his loft converted into an office to give him more room. The office will contain the usual computers, desks, etc., and be decorated and furnished in line with the proposed use. The full cost of the building work, decorations and equipment will come to £20,000 plus VAT which the company will pay because it will all be used for business purposes. The VAT on the work and equipment will come to £3,000, and Mr P wonders if the company can recover this.
Classic solution The normal answer is that the company can recover the VAT on the equipment, as they own it, and it is for business use. However, the VAT on the building work and decorations cannot be recovered because, prima facie, it is specifically blocked by the VAT legislation. (VAT 1994 s 24 (3) and (7)). This states,
“where a company purchases, acquires, or imports goods or services which are used or to be used in connection with the provision of domestic accommodation by the company for a director, those goods or services are not treated as used or to be used for the company's business, and any input VAT is not recoverable”.
Tip There is a little-known (even to HMRC) concession allowing the recovery of input VAT in certain circumstances. HMRC’s published and internal guidance states,
“Where a domestic room or rooms is put to business use, you may agree to an apportionment using an objective test to the extent to which the room is put to business use” (HMRC Manual V1-13, Section 14, para 14.7, and VAT Notice 700, Section 33,)
This means that if Mr P can show he intends using the loft conversion for entirely business purposes, then the company will be able to recover the VAT on the building work and materials. If he can show that the carpets and decorations are for a business purpose as well, than the company will be able to claim that VAT back too. The staff dealing with written VAT enquiries are more experienced in this area than normal VAT Officers, and have more time to consider the matter without the pressure to make a quick assessment. If you make a reasonable case, you should have no trouble getting the VAT back.
The same principle would also apply to extensions, garage conversions, and even using a shed at the bottom of the garden as your office. Provided there is genuine business use, and the purchases and decorations are in line with the proposed use, the VAT should be recoverable by the company.
[ On a more general tax note, the effect of exclusive business use of part of one's main residence on eligibility for CGT Principal Private Residence Relief should be considered, as well as home insurance, and possibly even council tax and business rates]
So you have to spend heavily on staff clothing. Golf club gossip says you can claim the VAT back. Is this so? What conditions apply to a successful claim?
Business expense HMRC says VAT incurred on uniforms or protective clothing can be claimed as input tax because it is a business expense.
The wig, gown and bands a barrister is required to wear in court are considered to be a uniform and the VAT incurred is therefore claimable as input tax.
Proving it's a business expense This can be tricky. A VAT Tribunal dismissed the taxpayer's argument that an art consultant required a high dress standard "to create a professional image."
The provision of clothing is normally a personal responsibility. A claim that business reasons require a high standard of dress does not justify allowing the VAT incurred to be claimed as input tax.
In another VAT Tribunal case it was stated "to dress well in order to conform with the standards of a particular lifestyle" was not a business expense.
Rock on! A classic case involved a musician who claimed the VAT back on a wig! HMRC paid him a visit (enough to raise anybody's follicles) and disallowed the VAT. He claimed the wig was needed to maintain his image as a musician. Photographs, posters, record and cd covers, press releases, and artwork (on which his business relied) would all need reprinting if his appearance changed.
He appealed to the VAT Tribunal who decided the wig had indeed been purchased for the purpose of his business and he could reclaim the VAT.
The VAT on clothing used solely as stage costumes is reclaimable. Ordinary clothing worn by an entertainer or celebrity will usually be worn privately as well in which case the VAT is NOT reclaimable.
Treat it as a gift Use the business gift rules to claim back the VAT on "perk" clothing (neither uniforms nor protective clothing). Perks are an accepted business expense so if you provide your staff with clothing the VAT incurred is a business expense. However, if the clothes cost more than £50 in any twelve-month period, you will have to account for output VAT on their value. Make sure the clothes are worth less than £50 excluding VAT.
