How Businesses Can Reclaim VAT on Bad Debts

If a situation arises where a customer fails to pay for goods or services that you have already charged VAT and paid this VAT to HMRC, then you can receive a refund for this sum by claiming bad debt relief. Thankfully, it is a very simple to do so, as long as you follow the recommended procedures and keep accurate records.
This refund is only possible if the debt adheres to these requirements:
1. The debt is more than six months old, yet less than three years and six months old.
2. You have taken the time to write off the debt in your VAT accounts and then transferred it to a separate bad debt account.
3. The debt cannot have been sold or handed to a factoring company.
4. You did not charge more than the normal selling price for said items.
To claim bad debt relief on your next VAT return add the amount of VAT that you are reclaiming to the amount of VAT that you are reclaiming on your purchases (input tax). Input this figure into Box 4 of your VAT return. You can work out how much bad debt relief that you can claim on a VAT inclusive balance by applying the VAT fraction to the unpaid amount.
Sometimes there are circumstances which can entitle you to a reduced amount of reclaim, like if your customer pays only part of what they owe you or if you hold an enforceable security against part of the debt. In these instances, you will only be able to claim bad debt relief on the unpaid amount.
Proper records must be kept. To successfully reclaim the VAT that you have paid on bad debts you will need a copy of the VAT invoice(s) for the items that you are claiming. If you did not issue an invoice, then you will need to keep paperwork that shows the relevant information. In a separate bad debts account you will need to record the amount written off as bad debt, the amount on which you have claimed, the VAT period that you are claiming, any payments received (shown separately for each invoice), the name of the customer and the invoice date and number (or similar information). Hold onto this information for at least four years.
Unfortunately some businesses, due to their nature, will have to deal with this issue on a regular basis. If this is the case for you, then do consider using the Cash Accounting Scheme. It will allow you to only pay the VAT to HMRC when a customer pays you, rather than when you invoice the customer.