How to Calculate Bad Debt Relief

How to Calculate Bad Debt Relief

Bad debt relief is something that every company needs to be aware of to help them recover from unpaid invoices. If you provide your services or products to a customer and then send them an invoice, you’ll have to ensure you are paying VAT to HMRC during your next tax return. However, when the client doesn’t pay their bill, this can leave you in a tricky situation and out of pocket. Keep reading to discover how you can calculate bad debt relief to ensure you don’t end up in debt moving forward. Learn more here about dealing with unpaid invoices to avoid this issue in the first place.

Try to Recover the Debt First

While bad debt relief is a path we recommend anyone to take when needed, you also need to ensure you’ve tried out any other option first. As a business, you need to make sure you are doing all you can to pay these invoices. While this can be a long and frustrating process, our team will be here to support you with this task. As a business, you really don’t want to lose money in the first place. While bad debt relief will help you to get the VAT back, it still means you’ve offered your service or product for free in the first place.

Chasing a late payment is the first thing you should do, but so many companies don’t even bother with this. You can send the statement again or chase up the customer by getting in contact with them in another way. You might find there is a genuine reason why they couldn’t pay on time, and you can work with them to find a resolution to this issue.

If you aren’t able to resolve the invoice issues this way, then it’s time to work with a debt collection agency to sort out the problem. Our team can help with recovering unpaid invoices but then can move on to help with VAT bad debt relief. Unpaid invoices are a huge issue for businesses, and this has only become more of a problem with the recent pandemic. Make sure you aren’t the victim of this and that you learn how to resolve invoice disputes.

Claiming Bad Debt Relief

Once you’ve done everything you can to try and claim back your funds, then it’s time to look at VAT on bad debts. You might even want to try taking someone to court first, but this will likely depend on the amount of VAT on bad debt written off and how much they owe you in the first place. After a certain point, it’s not worth pursuing this route anymore, and it’s easier to focus on writing off the debt instead.

To begin with, you need to ensure your company is eligible for VAT on bad debts to be written off. Not all transitions will be able to follow this route, so keep this in mind before proceeding. You will need to have accounted for VAT and already paid this bill to HMRC. You’ll then need to write off the debt in your ledger, before moving it to a separate account for bad debt. Keep in mind that the value of the supplies you offered should not be higher than the selling price, and the debt must not have been passed on to a factoring company.

You’ll need to wait at least six months after the payment is due, but it will also need to be claimed within four years and six months. If you fall out of these time frames, you won’t be able to benefit from bad debt relief. To make the claim, ensure you have the VAT invoice that you are looking to claim back on. A bad debt account will also be needed, which will show the amount you want to claim, how much was written off, and copies of the customer details and unpaid invoice. Once you have all the necessary resources in place, you can calculate the bad debt relief you can claim for.

One thing to remember is that if you did receive part payment for your work or product, you’ll only be able to claim the VAT back on the amount that wasn’t paid. In your VAT return, you’ll use box 4 to make a claim back, where you’ll include all the VAT you paid.

While we wish companies were able to avoid bad debt in the first place, we know this isn’t always possible. Our team is here to support you in any way we can, and help to reduce the chances of bad debt occurring in the first place. Contact us today via call on 0330 229 1991 or email your enquiry to for more information about claiming unpaid invoices and working with our team to resolve any outstanding issues you are experiencing.