It’s bad when a customer takes a long time to pay you, or doesn’t pay you at all. It’s even worse when you’ve already paid the VAT due on the sale over to HM Revenue & Customs. Of course, you’ll get the VAT back if the debt goes completely bad, but how long do you have to wait and could you avoid paying it in the first place?

VAT due on sales is usually accounted for on the return covering the date of issue of the sales invoice. If a customer fails to pay that will leave your business out of pocket. However, at least you can reclaim the related VAT you have paid.

You can reclaim VAT on an unpaid sales invoice if all the following conditions are met:

• the VAT has been included on an earlier VAT return
• the debt in question is more than six months overdue for payment
• the invoice(s) have been written off as bad debts in your business accounts.

Assuming the conditions are met, you can recover the VAT originally paid by adjusting your next return.

You should add the VAT element of the bad debt to the input tax figure in Box 4.

The VAT you can reclaim is the amount you charged on the original sales invoice.

Bad debt relief can be obtained automatically by adopting the cash accounting scheme. Normally you would have to pay the HM Revenue & Customs the VAT on any invoice you issue whether or not it has been paid. The cash accounting scheme allows you to defer handing over the VAT until you have been paid by your customer. Please contact us to see if your business is eligible.

What happens if the customer later pays you?

If you have claimed back VAT using the bad debt relief rules, but subsequently receive a payment from your customer, you should treat the payment received as VAT inclusive. You must repay the bad debt relief to HM Revenue & Customs on the return that covers the payment date.

The bad debt relief rules work both ways. So if you have reclaimed VAT (input tax) on a purchase invoice which is more than six months overdue, you must repay the VAT you have claimed on this invoice by adjusting the entry in Box 4 of your next return. However, when you do eventually pay your supplier, you can again claim the VAT as input tax in the usual way.