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Claiming VAT Relief on Bad Debts


There is every possibility that even if you have never fallen victim to a bad payer in the past, your business may find itself with a client who will not or cannot pay you.

If you supply goods or services to a client and are not paid for those goods or services, then you may be able to claim relief from VAT on bad debts that you have incurred.  Whilst Clarke & Son can assist you in recovering those bad debts, sometimes it is not possible.  It might be that the company goes into administration or an individual becomes bankrupt.

Not all businesses are aware that VAT registered businesses can obtain bad debt relief from HMRC.  This means you may be able to reclaim the VAT element of the supply of goods or services that you have not been paid for.

In order to reclaim the VAT, the debt must be unpaid for a period of at least six months after the date payment was due or the date of supply. The business must also have supplied the goods or services and accounted for and paid the applicable VAT to HMRC.  Finally, the amount needs to have been written off as a bad debt in the VAT bad debt account.


There are conditions which must be met to claim VAT relief on bad debts which includes:

  • The debt must not have been paid, sold or factored under a valid legal assignment
  • If the goods were supplied prior to the 19th March 1997, ownership must have passed to your client or through the client to a third party
  • You must have already accounted for the VAT on the supplies or services and paid to HMRC
  • You must have written off the debt in your usual VAT accounts and transferred it to a separate bad debt account
  • The value of the supply must not be more than the customer reselling price
  • The debt must have remained unpaid for a period of six months after the time payment was due and payable and the date of supply
  • The supply is made to a VAT registered client between the 26th November 1996 and the 30th April 1997
  • You must send a notice to them.  A copy of that notice must also be retained.


The law that covers the claiming of bad debt relief is Sections 26A and 36 of the VAT Act 1994 which covers the repayment of input tax when a customer fails to pay for its supplies received within six months of the relevant date.  In order to claim a refund, you should include the amount of the VAT you are claiming in box 4 of your VAT return which covers the date when you fulfil the conditions to make a claim.  You must keep records when claiming a refund including a copy of the VAT invoices for the supplies on which you are claiming a refund, and a separate VAT account.

Please note that if later, the debtor pays the debt or part of the debt, you would be obliged to repay the bad debt relief to HMRC by way of tax return.


If you would like any further information or advice, please contact a member of our Dispute Resolution department on 01256 320555 or mail@clarkeandson.co.uk

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