Bad debt relief

Under the normal rules of VAT, a supplier has to account for output tax even if the supply has not been paid for. VAT cannot be reclaimed by issuing a credit note for the unpaid amount.

Please note: The use of cash accounting or certain retail schemes removes the problem of VAT on bad debts from the supplier.

Conditions for bad debt relief

The supplier must have supplied goods or services for a consideration in money, and must have accounted for and paid VAT on the supply.

All or part of the consideration must have been written off as a bad debt by making the appropriate entry in the relief for bad debts account.

At least six months (but not more than four years and six months) must have elapsed since the later of the date of supply or the due date for payment.

Records required

Various records and evidence must be kept (for four years from the date of claim), in particular to identify:

  • The time and nature of the supply, the purchaser, and the consideration
  • The amount of VAT chargeable on the supply
  • The accounting period when this VAT was accounted for and paid to HMRC
  • Any payment received for the supply
  • Entries in the relief for bad debts account
  • The accounting period in which the claim is made

Procedure for claiming relief

The claim is made by including the amount of the refund in Box 4 of the VAT Return for the period in which the debt becomes over six months old.

After making the claim, all associated records as described above must be kept for four years from the date of the claim. However, this does not alter the standard requirement to retain all VAT related records for six years.

There are special rules for part-payments and mutual supplies.

Repayment of refund

Repayment of VAT refunded is required where payment is subsequently received or where the conditions have not been complied with.

A refund does not have to be repaid if the supplier is insured for the VAT inclusive amount of the debt and is repaid by the insurer.

Refund of input tax by debtor

Businesses are required to monitor the time they take to pay their suppliers, and repay input tax claimed if they have not paid within six months.

Subsequent payment of all or part of the debt will allow a corresponding reclaim of input tax.

Please call us if you would like further help or advice in this area.

SJD Accountancy

SJD Accountancy are the UK's largest specialist provider of fixed fee, Limited company accountancy services to contractors; we've been acting for contractors across the UK since 1992 and have more than 15,000 clients.

We are the only national specialist firm of contractor accountants with offices nationwide. SJD Accountancy has more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATT, AAT, CTA, ACCA, CA, ACA and FCCA.

  • Unlimited face to face meetings. This is a unique service only SJD Accountancy offers - unlimited face to face meetings across the UK - tax is complicated and sometimes only a meeting will do.
  • UK's Largest contractor accountants with more qualified staff. No call centres, no outsourcing, no automated call handling. Simply telephone, email or meet your own dedicated accountant face to face.
  • Money back service guarantee. All your Emails received by 4pm on any normal working day will be answered the same day. Should it be necessary to leave a telephone message it will be answered same day/following day latest or we will make a full refund of that months fee.
  • Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market, including: Best Accountant for Contractors, Accountant of the Year and Best Professional Service Team to name just a few.
  • All inclusive low cost fixed fee accountancy package which includes completion of accounts*, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, your own dedicated accountant* and all company returns for a fixed fee starting from £120 plus VAT per month. Check our packages for more detail.

If you have any questions about contracting or would like any further advice please call our new client services helpdesk on 01442 275789 or email: janice@sjdaccountancy.com. Our new client services helpdesk is open Monday to Friday (8am to 6pm).

Appoint SJD Accountancy and never worry about your tax or accountancy affairs again.

Form your own Limited company with SJD - our same day online company formation service includes company bank account set up, VAT/PAYE registration and advice on optimum share structure. 

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*If you would like us to complete your company year end accounts we simply ask that you have been a client of SJD for one year or have made 12 monthly payments. All accountants are part or fully qualified.