If you have supplied goods of services to a customer, you will need to account for VAT by declaring it in your next VAT return. If you do not get paid by the due date, you may be able to claim a VAT bad debt relief  on the amount of VAT you have already paid. You may also reclaim VAT on goods and serviced you have not paid for. The laws that govern the claiming relief on bad debts are:

VAT Act 1994, Sections 36 and 26A

VAT Regulations 1995, Parts XIX, XIXA and XIXA.

General Concept

If you have not received a payment due to you after a supply of goods or services has been made, you may claim a relief no matter if the payment was due in monetary form or in goods or services to be provided in exchange.

Since the concept of VAT Bad Debt Relief has been introduced, various changes were implemented to the way it operates and the time limits.

VAT treatment will be different depending on whether your business has got a bad debt or a credit note. If your customer has returned some goods, this will require a credit note. If your customer has made only a partial payment and cannot pay the rest of the funds owed, it requires a different approach and a different VAT treatment.

If you issue a credit note to a VAT registered client, the initial VAT does not need adjustment. You can also issue a document do reduce the original VAT invoice with the comment ‘’This is not a credit note for VAT purpose’’.

Bad Debt Relief

A bad debt means that a customer owes you some money and this payment is overdue. You may have already declared the VAT in your invoice and paid it to HMRC in due time. If you wish to reclaim it due to the fact that you will not be able to recover the payment or part of it. The following conditions should be met:

• The original invoice or part of it is 6 months overdue for payment
• No payment date is indicated in the invoice. The six-months period is based on the invoice date.
• The invoice must be written off in your accounting
• The debt has not been factored or sold

If the a VAT bad debt is made in the cash accounting system, the bad debt is automatic, because the output tax is not declared until the customer has paid. Please see VAT Notice 731 for further details. You can join this scheme if your taxable turnover is predicted to be less than £1.35m in the next 12 months. However, you cannot claim your input tax with the cash accounting until you have paid your suppliers.

Sometimes suppliers agree to reduce price on their products in exchange to the payment of the outstanding balance. In such case, it is also classed as a credit note rather than a bad debt. In this situation, you will be able to adjust your VAT in the next return compared to a bad debt wen you will have to wait for six months to be able to claim it back. Another advantage of using the credit note scheme will be that you should claim VAT back within four years ad six months of the later of the payment or the invoice date. The credit note adjustment is not time restricted.

Conclusion: You can issue a credit note to reduce the price for your customer and be able to adjust your VAT earlier. If not, you will still be able to claim the VAT relief after six months. You can consider the cash accounting if you are eligible.

Fiscal Representative – Rules changing for fiscal representatives in the EU (uk-accountant.com)

EU VAT when goods never leave the country (uk-accountant.com)

New VAT E-Commerce Package from 01st of July, 2021 (uk-accountant.com)