V7.429 Supply—bad debts

Part V7 Tax planning
Part V7 Tax planning | Commentary

V7.429 Supply—bad debts

Part V7 Tax planning | Commentary

V7.429 Supply—bad debts

A credit note cannot be issued to a customer on the basis that the customer has refused or been unable to pay the amount charged on an invoice. This is because a supply of goods or services has still taken place.

In such cases, the correct way of recovering unpaid VAT is by reclaiming bad debt relief. The basic rules are as follows:


    •     the debt in question must be at least six months overdue for payment – in the case of an invoice issued on 30-day payment terms, this would mean the debt can qualify for bad debt relief seven months after the date of the original invoice


    •     the whole or part of the debt has been written off in the accounts as a bad debt – and transferred to a specific bad debt account


    •     output tax on the original invoice must have been accounted for and paid to HMRC

A claim for bad debt relief is made by increasing the Box 4 (input tax) figure on the VAT return. If a business receives future payment in relation to a bad debt that has been written off in its accounts, then the receipt of money will be included in Box 1 for output tax purposes on the relevant VAT return (assuming it relates to a standard-rated supply).

A business also has an obligation to repay input tax to HMRC on any purchase invoices that are more than six months overdue for payment. This provision is applicable even

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