_Within the UK VAT system there are situations that can happen where businesses will have to pay VAT to HMRC before they have been paid by their customer. This can be an disaster for cash flow within a business. This is where bad debt relief can really help a business out. Where the business has accounted for the output VAT and paid it over to HMRC, but not yet received payment from the customer, it can claim a reimbursement for the outstanding amount. Small businesses really ought to be utilising this as they could be out of pocket for no good reason.
There are of course some conditions for bad debt relief to be able to apply to a business and to make it as easy as possible for you we have listed these conditions below.
Making the claim is not a huge task and it is in many respects relatively straight forward. On the VAT return form you need to enter the amount you wish to claim back into Box number 4 (as input tax) as if it were a purchase for the business.
It should be noted that any business wishing to make a claim must keep the relevant records for at least 4 years from the date of the claim to convey the above points to HMRC.
It is important to ensure you claim it as a bad debt and record it as such within your accounting records rather than issue a credit note. A credit note is only acceptable if there is a genuine change in the consideration of the supply. In addition, you want to notify that it is a bad debt as opposed to reversing the service/ commodity.
After a claim has been made the business should ensure that it keeps a track of any of these debtors if they pay up as the output tax would then need to be paid over accordingly.
Licenced Accountant in Brighton