VAT on Unpaid Invoices – Top Tips for Bad Debt Relief

VAT on Unpaid Invoices – Top Tips for Bad Debt Relief

Unpaid invoices in the UK have been a huge issue for many companies over the past two years. Here at Direct Route, we’ve seen a massive increase in the number of outstanding invoices that companies are dealing with on a regular basis. To help you discover how you can deal with VAT on unpaid invoices, we’re here to share our top tips for bad debt relief.

The Conditions for Bad Debt Relief

When you have an unpaid sales invoice, you’ll find that bad debt relief is available when certain conditions are met. Firstly, at least six months will need to pass from the date that the payment was due or the supply. You’ll work with the later date and then count the six months from there. At this point, you’ll also need to have accounted for the VAT and then pay this off to HMRC from your business accounts. When you have written off the debt from VAT accounts, it will need to be transferred to a separate account for bad debt to be eligible for bad debt relief.

Keep in mind that bad debt relief must not include any invoices that are higher than a normal selling price. Under no circumstances can a company be in any form of factored arrangement to benefit them. If you meet all of these conditions, you can then claim this relief on the next VAT return you file. In Box 4 of the return, you’ll find that you can add the amount of bad debt to claim it back. As with any type of VAT return, you’ll need to ensure that you keep the related invoice for up to four years after making a claim.

Paying Back Unpaid Purchase Invoice

When you claim VAT on an invoice, it’s critical that you pay your VAT bill on time. While you might have issues with bad debt, it’s also important for a business owner to invoice with VAT correctly. When an invoice has not been paid for over six months since the date, this VAT needs to be added to your next return that you submit to HMRC. You’ll include this in Box 4 with a negative number. This reduces the amount of VAT you can recover and will ensure your accounts are submitted correctly.

Can You Claim Bad Debt Relief on a Part Payment?

If you are wondering if you can claim bad debt relief on VAT invoices that have a part payment, the good news is that this is possible too. If you only receive a partial payment, you’ll find that the amount of relief you can claim is reduced in proportion to the amount when claiming VAT on old invoices. You’ll always need to allocate any payment you receive from a client to the oldest supply first and then work through towards more recent ones.

VAT Optimisation

During the COVID-19 pandemic, many companies took advantage of some measures in place to help out businesses with VAT invoices. If you haven’t already audited your VAT invoices, now is a great time to take control of your business expenses for the future. We recommend taking the time to review the processes you have in place. You’ll want to consider how you attribute VAT to costs to ensure that your business is reducing VAT everywhere possible. If you are operating with the charity sector, use reduced rate reliefs where these are available to you. This can help to lower costs even further.

For businesses that are unsure where to start when it comes to bad debt relief, we always recommend working with a team of professionals who are experienced in this area. When dealing with any type of financial concerns or questions, you’ll find that people who work with these issues on a daily basis will be able to come up with a conclusion to any troubles you are facing. Our team can assist you with VAT invoices and ensure you aren’t overpaying or underpaying your VAT bills. We’ll help you with bad debt relief when you haven’t been paid on time, helping you to keep your business afloat during these challenging times.

We know how tough the past years have been on businesses in all industries. You’ll find that the financial concerns as a result of the COVID-19 pandemic are still around for many companies. That’s why we highly encourage you to review your VAT processes to ensure you maximise bad debt relief where possible. We’ll be here to support you to the best of our ability and help you to get back on track over the coming months. For more information about bad debt relief, contact us on 0330 229 1991 or email your enquiry to today. We’ll be happy to answer any questions you have and work with you to help your business thrive in the future.

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