The following Value Added Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:
This guidance note provides an overview of VAT BDR provisions. For an overview of the VAT implications on a customer who has not paid for a supply of goods and services, see the Bad debt relief ― repayment of VAT by the debtor guidance note.
A business can recover VAT paid to HMRC on supplies of goods and services if the customer has not paid and the following conditions are satisfied:
the business must have charged VAT at either the standard or reduced rate
VAT must have been accounted for to HMRC (see below)
the VAT amount must have been written off in the VAT accounts and have been transferred to a special VAT bad debt account
the value of the supply must not exceed ‘open market value’
the debt must not have been transferred, sold or factored under a valid legal assignment
the debt must have remained unpaid for at least six months from the later of:
the date payment was due
the date of the supply
VATA 1994, s 36(1), (4)(a); SI 1995/2518, reg 165A(1); VBDR1500
Businesses should never issue a credit note in order to recover VAT incurred on a bad debt.
The business has the right of appeal if HMRC denies a claim for BDR. Please see the Appealing an HMRC decision ― outline guidance note for more information.
One of the conditions stated above indicates that the VAT must have been paid to HMRC. In this case, TRML appealed against a decision by HMRC to reject a claim for BDR on the basis that the company had not originally paid the output VAT due. The Tribunal found that the deduction of input tax from output tax due should be seen as, in effect, payment of that output tax. HMRC has stated that where a BDR claim is made, payment will be taken to have been made to the extent that output tax is covered by
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