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’ve allowed you to claw back VAT paid to HMRC on unpaid invoices more than six months old.
It’s a welcome relief, returning to your bank account VAT you’ve 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.
Vetting sales and purchases in this way should be part of the process you undertake before submitting a VAT return.
Businesses making bad debt relief claims must keep records for four years from the date of the claim to show:
• the time and nature of supply, purchaser and consideration – normally a VAT invoice will show this
• the amount of VAT and the accounting period it was paid to HMRC
• any payment received for the supply
• details of entries in the ‘refunds for bad debts account’.
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.
If you’re experiencing issues with VAT or bad debt and would like some advice then please get in touch. To book a free consultation with one of our senior accountants call 01785 248 939.