Claiming VAT bad debt relief (BDR)

Produced by Tolley
Claiming VAT bad debt relief (BDR)

The following Value Added Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Claiming VAT bad debt relief (BDR)
  • Conditions for reclaiming VAT
  • Times Right Marketing Ltd (TRML)
  • British Telecommunications plc v HMRC and HMRC v GMAC UK plc
  • Gas and electricity suppliers
  • Payment
  • VAT only invoices
  • Records
  • Calculating a claim
  • Hire purchase, conditional or credit sale agreements
  • More...

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.

Conditions for reclaiming VAT

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:

  1. the business must have charged VAT at either the standard or reduced rate

  2. VAT must have been accounted for to HMRC (see below)

  3. the VAT amount must have been written off in the VAT accounts and have been transferred to a special VAT bad debt account

  4. the value of the supply must not exceed ‘open market value’

  5. the debt must not have been transferred, sold or factored under a valid legal assignment

  6. the debt must have remained unpaid for at least six months from the later of:

    1. the date payment was due

    2. 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.

Times Right Marketing Ltd (TRML)

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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