The VAT bad debt relief rules allow businesses to claim bad debt relief and reclaim the VAT they have paid to HMRC. This can happen when an invoice has been issued to a customer and no payment has been received after an extended period of time (usually 6 months after the due date) has elapsed.
Under the normal VAT accounting rules, a business supplying goods or services usually accounts for VAT at the time an invoice is raised irrespective of whether payment has been received or not. There are a number of conditions which must be met in order to claim bad debt relief.
The conditions are set out in HMRC’s Notice 700/18 entitled Relief from VAT on bad debts:
Businesses that account for VAT under the Cash Accounting Scheme and businesses that use certain retails schemes only pay VAT on the cash amounts they have actually received from customers. This makes bad debt relief claims unnecessary as VAT is only paid when the customer pays what is owed. Small businesses that suffer from a significant amount of bad debts should consider if it would be beneficial to apply to use the Cash Accounting Scheme.
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