What is the VAT bad debt relief scheme?

The VAT bad debt relief scheme is welcome for many business owners but not everyone knows about it!

In these current economic times, it’s sad to see that business insolvencies are on the rise. More than 20,000 went bust in 2022 and with them many invoices will have been left unpaid.

For the businesses that are left with a hole in their finances due to their clients and customers becoming insolvent, any kind of help is welcome. There is a chance that those VAT registered companies might be able to use the VAT bad debt relief scheme to cover some of that loss.

To find out if it works for your business, here’s our guide…

Businesses can claim relief from VAT on bad debts if you have sold goods or services that have not yet been paid. There are conditions to meet, of course, and it is only open to those businesses that are registered for VAT.

If you use the VAT accounting scheme then the VAT on the invoice is not due until your customer pays you. That means you don’t need the relief scheme as you haven’t anything to claim back.

But if you’re using the invoice accounting method then you will have paid the VAT so can claim it back from HMRC.

When can you claim VAT Back?

You can claim VAT back using the VAT bad debt relief scheme if the debt is more than 6 months old. It is counted from either the later of the:

Date the payment was due, or
Supply date

Check your credit terms and agreements to establish when payment was due. You will not be able to claim the relief before the supply meets the 6-month rule.

If you have unpaid invoices, then you must also claim the relief within 4 years and 6 months of the latter of the:

Date the payment was due and
Supply date

The conditions

There are conditions to meet when claiming back on bad debts. They are:

The sale must already have been included in your VAT return and it must have been paid to HMRC. You can’t claim if you haven’t invoiced your client.
Any debt must have been written off in your accounts. It must be shown in your bad debt account.
The bad debt must not have been paid or sold to a debt recovery company.
It must meet the 6-month rule mentioned above.
Your customer is the owner of the goods.

Does VAT leave you flat?

If keeping track of VAT is difficult as you run your business, our team of accountants can help. We deal with businesses across the UK, so contact us today to speak about your VAT issues.