Egan Roberts is a Chartered Accounts & Financial Advisors based in Lancashire. A lot of our clients come to us for advise on old debts that are sat on their sales ledgers, also known as ‘Bad Debts’.
If you are in this situation please give us a call on 01254 583515 and we will be happy to help.
For more details on bad debts and the relief available please read on.
One of our clients came to us with a query regarding a debt on their ledger, which was overdue by more than six months.
After much chasing over a long period, the debtor agreed to pay the debt. However, he was saying that he should only pay the net amount as the debt was more than six months overdue and that our client could, therefore, recover all the VAT under the bad debt relief rules.
This is incorrect and the point was tested up to the Court of Session in the case of Revenue & Customs Commissioners v Simpson & Marwick.
To be able to make a claim for BDR for VAT the creditor must have:
• accounted for the output tax on the supply and paid that output tax over to HMRC;
• written the debt off in the day to day VAT accounts and transferred it to a separate bad debt account, and
• more than six months must have elapsed after the due date for payment or the date of supply, whichever is the later.
However, BDR is calculated on the amount outstanding, so when a debtor makes a part payment of a debt, the payment is treated as being inclusive of VAT. For example, if the debt is £120 including £20 VAT and the debtor pays just £100, leaving £20 outstanding, then the VAT fraction of 1/6 is applied. The debtor is deemed to have paid £83.33 + £16.67 VAT. The VAT element of the outstanding part will be £3.33 and only this sum will be claimable as BDR. The claim is entered in Box 4 of his return.
There is a corresponding rule that applies to the debtor. This means that where he has not paid a creditor and there is an amount outstanding more than six months after the due date for payment, then any input tax claimed on this unpaid element must be repaid to HMRC.
The debtor, in this case, should have repaid the input tax in full to HMRC in the period when the debt went over six months old. Assuming he has done this correctly, if he now pays the net amount only, he will need to treat the amount he pays as VAT inclusive and apply the VAT fraction to see how much of the input tax he can recover, and would put that figure into Box 4 of his return in the period when he makes the payment.
The blog was about bad debts and the relief you can claim on them as this is a question we are often asked.
Again, if you have a similar query or would like any more information on the above please contact Egan Roberts on 01254 583515 and we would be happy to help.