Do you want to know How I can claim bad debt relief? My experience tells me that if you fulfill all the requirements, also you can be exempt from paying VAT on bad debts for the goods or services you have provided.
Regardless of whether the money products, or services were paid to you through a barter arrangement, you are entitled to relief. That’s not all, though; I’ll tell you more about how to file for bad debt relief as you read on.
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Now, let’s get started.
What Is ‘Bad Debt Relief’
Under the UK VAT system, there are instances where a company must pay VAT to HMRC before receiving payment from their client. The cash flow of a company may suffer greatly as a result.
Thankfully, “bad debt relief” is available to assist companies in similar circumstances.
The company is entitled to repayment for any output VAT that it has accounted for, paid to HMRC, and is still awaiting payment from the client.
Am I Eligible To Claim ‘Bad Debt Relief’
Naturally, in order to be eligible for bad debt relief, a few requirements must be fulfilled. A few of these circumstances are mentioned below:
- In reality, goods and services have been provided.
- Your books and records provide an accounting of the output tax for such goods or services.
- The VAT has already been paid to HMRC.
- There has been a six-month lag between the due date and the date of supply of the goods or services.
- Verify that the unpaid balance has been accurately written down in the accounting records.
- If your company satisfies these conditions, there’s a strong likelihood you can file a claim.
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Who Can Claim For Bad Debt Relief
The procedure for claiming bad debt relief is simple. But in order to qualify for bad debt relief, your debt has to fulfill a few requirements:
Your client has to have received a supply from you and been charged the VAT.
The VAT has to be reported to HM Revenue & Customs (HMRC) by paying the VAT owed on a prior VAT return and included in that return.
The debt could not be settled or transferred to a factoring business. You are then eligible to get VAT bad debt relief if a factored debt is reallocated to you in accordance with the conditions of the factoring agreement.
There was no sale of the products or services for more than the going rate.
The debt has to be transferred to a different bad debt account and wiped off from your VAT accounts. To wipe off a debt for VAT reasons, a credit note cannot be issued.
The debt must be less than four years and six months old and more than six months past due. Instead of measuring from the invoice date, this is measured from the day the debt was due (or from the date of supply if this was later than the due date).
You must maintain a record of the invoices for which you are requesting bad debt relief if you are doing so for unpaid bills.
You must be able to document in your records how they were distributed if a portion of the loan has been paid off.
It is advisable to retain these documents in a separate file from a copy of the return on which you made the relief claim.
It’s always a good idea to speak with an expert if you need clarification on whether your debt qualifies in order to learn more about your eligibility and the steps involved in requesting relief.
When Can Bad Debt Relief Be Claimed
You need to wait for a minimum of six months from the latter of the following:
- At the time when payment was unpaid and due
- the end date of the supply
Your standard credit terms might establish the date on which payment is due, or it can be defined by any extended length of time for payment that you consent to with your consumers.
On a tax return, you are not permitted to claim for an accounting period that is earlier than the one in which you become eligible for financial relief.
You have until the later of the following dates to submit a claim for supplies that were manufactured after the 30th of April in 1997:
- at the time that payment is due and payable
- the end date of the supply
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What Are The Conditions For Claiming Bad Debts
The requirements for requesting bad debt relief are as follows:
1. Your client has to have received a supply from you and paid the VAT. The VAT has to be reported to HM Revenue & Customs (HMRC) by paying the VAT owed on a prior VAT return and included in that return.
Sales conducted under the Cash Accounting system, in which you do not report to HMRC for VAT on your sales until you are paid, are not eligible for bad debt relief.
2. The debt needs to be past due by six months. Instead of measuring from the invoice date, this is measured from the day the debt was due (or from the date of supply if this was later than the due date).
Therefore, before you may request bad debt relief, you must wait 30 days and six months if your conditions of trade include a 30-day credit period.
Whether your consumer has already entered bankruptcy, liquidation, or any similar situation is irrelevant. You still have to wait for the regular credit term plus six months.
3. Your accounts need to reflect the debt being wiped off. If you would like to give evidence against the debt instead of having it erased from your records entirely, you can accomplish this using a memo account. But one has to keep up a “refunds for bad debts account.”
To wipe off a debt for VAT reasons, a credit note cannot be issued.
4. The supply could not have been provided for more than the open market value, which is understood to be the going rate for the product.
5. The debt cannot have been calculated or sold under a formal assignment. You are then eligible to get VAT bad debt relief if a factored debt is reallocated to you in accordance with the conditions of the factoring agreement.
What Are The Qualifying For Bad Debt Relief And Claiming Bad Debt Relief
In order to be eligible for bad debt relief, you must fulfill the following requirements:
You have provided products or services in exchange for monetary compensation, and you have registered for and paid GST on the provision;
You have recorded in your records as a bad debt the whole or any portion of the consideration for the supply;
A 12-month term that started on the date of supply has passed, or the debtor has become insolvent before that time has passed;
- You’ve recovered the debts by taking appropriate action;
- The supply’s worth is either the same as its open market value or less, and
- When it comes to things, your buyer has to have gained possession of them.
Requesting relief from bad debts:
- Download the Bad Debt Relief Self-Evaluation Checklist (DOC, 128KB) and fill it out.
- If you meet every requirement in the self-review checklist, go ahead and file a claim in Box 7 (input tax and refunds claimed) on your GST return.
The self-review checklist should be kept with your records even if it is not required to be submitted to IRAS. During an audit, you can be required to give this checklist.
How Much Can You Claim Bad Debt Relief?
The amount you sold the aggregate for determines the two rates at which you might apply for bad debt relief.
If the aggregate, you sold for had a price per tonne of:
- At least double the levy rate at that time; otherwise, you may seek relief at the full tax rate.
- You are only eligible to deduct debt relief for half of the total transaction value, which is less than double the rate of the levy at the moment.
As an illustration:
- You are eligible for bad debt reduction at the rate of £2 per tonne if the levy was £2 per tonne and you sold the aggregate for £4 per tonne.
- You are eligible for a debt reduction of £1.50 per tonne if you sold the aggregate for £3 per tonne.
- Only the balance of the debt owed is eligible for bad debt relief.
As an illustration:
- Payments and charges Quantity
- The entire cost for 20 tonnes of aggregate was £160.
- The payable aggregate levy is £40.
- Received payment of £42
- Amount owed: £118
- Reimbursable for bad debt relief: £118 × £160 × £40 = £29.50
When a consumer pays you for more than one debt, you should apply the cash to the oldest bills first.
This includes paying off debts related to non-aggregate or non-taxable transactions, including plant rental or transportation.
How Do You Claim Bad Debt Relief
You can calculate your claim after making sure you meet the requirements listed above and that you are qualified for Bad Debt Relief.
Prior to filing a claim, confirm that you have the necessary documentation:
- A duplicate of the VAT invoice supporting your reimbursement claim
A terrible debt history that demonstrates:
- The sum that you have deducted
- How much VAT you want to claim
- VAT time frame for which you’ve requested reimbursement
- The total amount of VAT applied to each transaction.
- VAT period during which you first recorded the supply’s VAT
- Received payment for every supply
- The customer’s name
- The invoice number and date of nonpayment
- A duplicate of every notification sent
- You can determine the amount you are qualified for after all the paperwork is in order.
You are entitled to reimbursement for the entire amount of VAT that you were responsible for and paid if your claim for relief is based on a single supply for which you have yet to be reimbursed.
You can only get relief on the VAT related to the portion of the supply that has not been paid for if you have received partial payment.
All payments should be applied to the earliest supply made unless the client has indicated that a payment is connected to a specific supply and pays for that supply in full.
Once you’ve determined how much VAT you qualify for relief from, you may submit your claim by entering that amount in box 4 of your VAT return.
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Final Thought
Now that we have established How to claim bad debt relief, it is true that Bad debts are tax deductible for both people and businesses. However, they will have to declare the amount they withheld as income if the bad debt is eventually paid off.
You must maintain a record of the bills for which you are requesting bad debt relief, as well as the methodology used to compute said relief.
If you have received partial payments, you must demonstrate how they were distributed. VAT Notice 700/18/02 contains payment allocation guidelines.
VAT relief on non-performing loans. As mentioned above, you have to maintain the “refunds for bad debts account.”
It is recommended that these documents be stored in a VAT file with a copy of the return that the relief was requested for.