Could your business claim Bad Debt Relief on unpaid invoices?

28/08/2019

When you’ve provided goods or services to a customer that just won’t pay, you can be left counting the cost of the non-payment, including the VAT element you’ve already paid to HMRC.

When you find yourself dealing with bad debt, the impact on your cash flow can be devastating. Some salvation can come in the form of Bad Debt Relief, which allows you to claim back the sum already paid in VAT to HM Revenue and Customs.

Before you apply for Bad Debt Relief, it’s important to be sure that you’ve exhausted all your options for recovering the debt, as you will be required to write the debt off in order to benefit.

Options for recovery

When it comes to recovering a debt, there are several steps that you can take to try and encourage a customer to pay before you turn to Bad Debt Relief.

The first will normally include some form of in-house recovery attempts, such as issuing reminders, chasing the customer for payments and trying to negotiate a solution internally.

If in-house recovery efforts are ineffective, the next step would be to employ the services of a debt collection agency to chase the debt for you. Sometimes just the knowledge that you have escalated the debt to a third party will be enough to get a customer to pay, but if not, the debt collection agency can often use their experience to deliver a resolution.

The final option for dealing with customers who refuse to pay is to take legal action against them and attempt to obtain a CCJ (County Court Judgment) that orders them to pay.

Once you have exhausted these options and feel that you are no longer willing to spend any more time or money chasing the debt, you can begin preparing to claim Bad Debt Relief.

Are you eligible?

The first step is to determine if you are eligible. There are a number of conditions that you must meet to claim Bad Debt Relief:

You must have accounted for the VAT on the supplies and paid it to HMRC.
You must write off the debt in your day to day ledger and transfer it to a separate bad debt account.
The value of the supply must not exceed the customary selling price.
The debt must not have been paid, sold or passed to a factoring company.

There are also certain time restrictions on when an application can be paid. It must fall at least 6 months after both the payment was due and payable and the date of supply, and within 4 years and 6 months of this date.

How to claim

Once you are certain that you are eligible for Bad Debt Relief, you must gather all the records you may need and calculate the amount you are eligible to claim.

When making a claim, make sure you have the following records:

Copy of the VAT invoiced for the supplies you are claiming a refund for
A bad debt account which shows:
- The amount you have written off
- The amount of VAT you wish to claim
- VAT period in which you have claimed a refund
- Total VAT charged on each supply
- VAT period where you originally accounted for VAT on the supply
- Payment received for each supply
- Name of your customer
- Date and number of the unpaid invoice
- Copy of any notice issued

With all the records in place you can figure out the amount you are eligible for.

If your claim for relief is based on one supply for which you have received no payment, you can claim the full amount of VAT you accounted for and paid.

If you have received part payment, then you are only eligible to claim relief on the VAT that relates to the unpaid portion of the supply. Unless the customer has specified that a payment related to a particular supply and pays for that supply in full, any payments should be allocated to the earliest supply made.

When you have calculated the amount of VAT you can claim relief on, you can make your claim by including this amount in box 4 of your VAT return.

Are you struggling with late payment but want to avoid writing off the debt? Hilton Baird Collection Services can help you to recover unpaid invoices and guide you through the process. Call us on 0800 9774848 or get a quote here.