VAT bad debt relief

If you use standard VAT accounting – pay VAT on sales when invoiced and claim back VAT on purchases when invoiced – you may have availed yourself of the six months claim for bad debt relief on unpaid invoices. This would have allowed you to claw back VAT paid to HMRC on invoices that are more than six months old and still unpaid.

This is a welcome relief, as it returns to your bank account VAT you have paid to HMRC, but never received from your customer.

Unfortunately, this is not the whole story.

As indicated above, you will also need to take a careful look, prior to completing your periodic VAT return, to see if there are old invoices in dispute on your purchase ledger – invoices that you receive from suppliers. If they are more than six months old you will have to pay any VAT input tax you have previously claimed back to HMRC.

Accordingly, vetting your sales and purchases in this way should be part of the process you undertake before submitting a VAT return.

An alternative approach to VAT accounting may be available to you. If your turnover, before VAT, is £1.35 million or less, you could change to the VAT cash accounting scheme. Using this scheme, you will only pay output VAT, or claim back input tax, when payment is received from a customer or paid to a supplier. This generally works best if your business is consistently owed more from its customers than it owes to suppliers.

Please call if you would like more information about the VAT special schemes, or help more generally with completing your VAT returns.

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