Can you claim bad debt relief on unpaid invoices?

04 December 2020

In a period of economic uncertainty, businesses need all the stability they can get.

Unfortunately, when invoices go unpaid, a point of frustration can quickly evolve into a considerable cashflow issue that is capable of threatening the very survival of the business. As well as being out of pocket for the costs that were already sunk into providing the goods and services in the first place, business owners are still forced to pay the Value Added Tax that HMRC requires them to collect on behalf of the customer.

Fortunately, some relief can be claimed in the form of Bad Debt Relief, which allows you to claim back the amount already paid in VAT from HMRC. If you’re struggling with cash flow issues as a result of unpaid invoices, read on – the following guide provides an outline of who can claim for bad debt relief, how to claim and other options for recovery.

Who can claim for bad debt relief?

Claiming bad debt relief is a fairly straightforward process. However, to be eligible to claim bad debt relief, your debt must meet certain conditions:

  • You must have made a supply to and charged the VAT to your customer. The VAT must have been accounted for to HM Revenue & Customs (HMRC) by including it on a previous VAT return and paying the VAT due on that return.
  • The debt can’t have been paid or passed across to a factoring company. If a factored debt is reassigned to you under the terms of the factoring agreement you can then claim VAT bad debt relief.
  • The goods/services weren’t sold for more than the customary selling price.
  • The debt must be written off from your VAT accounts and be placed in a separate bad debt account. You cannot write off a debt for VAT purposes by simply issuing a credit note.
  • The debt must be more than six months overdue and less than four years and six months old. This is measured from the date the debt was due rather than the invoice date, (or from the date of the supply if this was later than the due date)

If you are claiming bad debt relief for unpaid invoices, it’s important that you keep a record of the invoices you are claiming bad debt relief on. If part of the debt has been paid, you must be able to show in your records how these were allocated.

We recommend keeping these records together with a copy of the return in which you claimed the relief in a separate file. If you aren’t sure whether your debt meets the conditions, it’s never a bad idea to consult an expert to get clarity around eligibility and the process for claiming relief.

 

How to claim for bad debt relief

If your debt does meet the above conditions, you’ll need to gather together all the following records:

  • A copy of the VAT invoiced for the supplies you are claiming relief on.
  • A statement for your bad debt account that clearly shows how much you have written off, the amount of VAT you wish to claim, the VAT period in which you have claimed a refund the total VAT charged on each invoice.
  • You will also need to provide the dates of the period for which you originally accounted for the VAT on supply, the name of your customer and the dates and numbers of the unpaid invoices. If you issued a notice/s to your customer regarding the payment, a copy of this should be provided alongside your claim.

With all your records in one place, you’re ready to calculate the amount of debt relief you may be eligible for. If it’s just one unpaid invoice for one transaction, you will usually be able to claim back the full amount of VAT that you have already paid to HMRC. If you’ve received a part payment, you will only be able to claim a refund for the VAT that relates to the unpaid portion of the outstanding invoice.

Keep a record of how you have calculated the amount due for bad debt relief along with the rest of your documentation. Once you have calculated the amount you think is due, you can claim for bad debt relief by inputting this figure in Box 4 of your VAT return.

How to recover unpaid invoices

Claiming bad debt relief for the VAT paid to HMRC on unpaid invoices is just one of the avenues for recovering some of the costs you’ve lost from customers who have failed to pay the monies owed.

If the invoice isn’t six months overdue just yet, you can pursue debt recovery via legal action by way of a letter or email from your solicitor. This communication will warn of further legal measures taken should the invoice remain unpaid, and typically prompts the debtor to pay what is owed. If not, a statutory demand can be issued as a further warning and pre-cursor to stronger action.

Should these efforts be ineffective, the next step would be to get a debt collection agency involved. Often, just alerting the debtor that the overdue invoice has been passed on to a third party will prompt them to pay.

In the worse-case scenario, you have the option to obtain a CCJ (County Court Judgment) that orders them to pay. In any case, you are well within your rights to charge your customers statutory interest on overdue invoices to help cover the costs of debt collection.

Whatever the circumstances, our specialist debt recovery lawyers are here to assist you in securing relief from bad debts and the cash flow issues they create. For a free consultation, get in touch via the contact form or through our online chat service.

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