Using VAT bad debt relief to help cashflow

Using VAT bad debt relief to help cashflow

If you had customers holding accounts with you before the start of lockdown, it’s possible that those balances might still be outstanding and relate to periods before March.

You may already be aware that some of these customers have gone out of business, or they could be taking longer to pay due to the temporary suspension of trade.  In both scenarios, you should consider whether VAT bad debt relief is available.

VAT bad debt relief allows you to reclaim from HMRC the output VAT element on outstanding balances, and at the moment every little help, especially as the deferral of VAT payments are scheduled to end on 30 June. 

In order to claim, the debt needs to be 6 months overdue for payment with the clock for this starting from the end of any credit period you grant your customer.  I’ve heard this relief described more as slow payer relief because it does not need to be certain that you will never be paid.  Should your customer settle the invoices in a future VAT period, you would simply repay the output VAT to HMRC.

The downside of automatic bad debt relief is that customers are also meant to look at their purchase ledger balances for any 6 months overdue.  The input VAT recovery on these must be reversed until the time they pay the supplier.  In practice, if you were subject to a VAT inspection, HMRC would assess for the VAT on any balances outstanding and charge interest to reflect the timing difference of when the VAT reversals should have been actioned. In addition, if you negotiate amended payment terms with your supplier, the 6 month period would commence from this later date.

If you would like to understand these rules further, please contact me at michelle.malone@ase-global.com

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