Value Added Tax

Claiming VAT bad debt relief (BDR)

Produced by Tolley
  • 21 Dec 2021 16:47

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)
  • What are the conditions for reclaiming VAT?
  • Gas and electricity suppliers
  • What constitutes payment?
  • VAT only invoices
  • How are hire purchase, conditional or credit sale agreements treated?
  • Repossessed goods
  • Reservation of title agreements
  • How does BDR and accounting schemes interact?
  • Annual accounting
  • More...

Claiming VAT bad debt relief (BDR)

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.

For a video overview of the bad debt relief provisions, see the Bad debt relief video.

What are the 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. the VAT charged must have been accounted for to HMRC

  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, VBDR1900, VBDR4100; HMRC Notice 700/18, paras 2.2–2.3

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

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