Claiming VAT bad debt relief (BDR)

By Tolley

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

  • Claiming VAT bad debt relief (BDR)
  • Conditions for reclaiming VAT
  • Payment
  • Records
  • Calculating a claim
  • Hire purchase, conditional or credit sale agreements
  • Claiming BDR
  • Payment subsequently received
  • BDR and accounting schemes
  • Cancelled VAT registration
  • VAT groups
  • Transfer of a business as a going concern
  • Sale of property under a power of sale ― recovery of VAT on costs incurred by mortgage lenders
  • Union and non-union VAT MOSS scheme returns

This guidance note provides an overview of VAT bad debt relief 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.

VBDR1000; De Voil Indirect Tax Service V7.471, V5.156 (subscription sensitive); HMRC Notice 700/18 
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:

  • 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 (VBDR1900; VBDR4100)
  • 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
  • if the supply was made before 19 March 1997, ownership of the goods must have transferred to the customer
  • for the period between 26 November 1996 and 31 December 2002, the supplier was required to send a notice to any VAT registered customers, advising them that it was making a BDR claim

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

More on VAT compliance and bad debt relief: