The VAT bad debt relief rules allow businesses to claim bad debt relief and reclaim the VAT they have paid to HMRC. This can happen when an invoice has been issued to a customer and no payment has been received after an extended period (usually 6 months after the due date) has elapsed.
Under the normal VAT accounting rules, a business supplying goods or services usually accounts for VAT at the time an invoice is raised irrespective of whether payment has been received or not. There are conditions which must be met to claim bad debt relief.
Bad debt relief may be claimed in respect of supplies made under margin schemes, subject to a maximum of the VAT on the margin. If the debt is equal to or less than the profit margin, bad debt relief may be claimed on the VAT fraction of the debt. However, if the debt is greater than the profit margin, bad debt relief is limited to the VAT fraction of the profit margin – since this is the amount of VAT that the supplier has paid to HMRC.