Bad Debt Treatment

I have banged on enough about the surprising consequence of tax points being based on the date a product is sent to a customer or service completion dates. That consequence being that VAT might be payable before that VAT has been received. This may well become the case in a debt that never gets paid - ie bad debt.

Before you decide that life is not worth living, there is a sensible solution ie a business can claim back VAT paid on bad debt. In other words, if the business pays over VAT which they never themselves receive, there is a mechanism to claim that VAT back from HMRC.

The only issue here is with what HMRC accepts as evidence that the invoice is now bad debt. This requires the debt to be at least six months old (ie it is more than six months since the due date for payment) and the debt has been formally written off in the companies accounts. There is a limit of three years and 6 months from the payment due date after which the VAT cannot be reclaimed.