By Ola Sulaimon
AT the start of a new year, business owners tend to review last year’s performance and chase outstanding invoices from their clients.
Generally, a fully taxable business is entitled to charge VAT on the supply of goods and services they provide to their customers. This would mean they have immediately invoiced their customers after providing these services or goods. Business owners then have to report VAT received to HMRC and pay any VAT due or claim VAT back.
So what happens when VAT has been reported to HMRC and the client doesn’t pay?
When the client doesn’t pay the amount owed, the business would not only be losing the amount for the goods or services but also an extra 20 per cent already paid to HMRC in their VAT submissions.
Although under accounting, they could claim Bad Debt Relief but the 20 per cent VAT is still lost.
HMRC has a relief that a business could claim if certain conditions are met.
The conditions are as follow:
* The goods or services has been supplied.
* The business owner has accounted for and the output VAT paid over to HMRC on the supply.
* The whole or part of the consideration has been written off in the traders account as a bad debt.
* To be able to claim the bad debt relief, the supply of the goods or services must have been provided and unpaid for six months before the claim was made.
* The claim must be made within four years and six months from the later of the date of the supply.
* Finally, the value of the supply must be equal to or less than its open market value.
How to claim Bad Debt Relief
* If the conditions stated above are met, the business owner can claim a refund or bad debt relief. The amount of the VAT you are claiming should be input in Box 4 of the VAT return.
* Also, they must keep a record of a copy of the VAT invoices for the supplies for which you are claiming a refund and a bad debt account showing the necessary information required.
* If there are several other invoices, the payment should be allocated to the earliest supply made unless the customer specifies that a payment is for a particular supply and pays in full.
To find out more contact Ronzl Accountants Ltd, 51 Billing Road, Northampton, call 01604 965826 or see the website at www.ronzlaccountants.co.uk