If you have made supplies to your customers on or after 1 October 1989 and have not been paid, you can claim relief from the VAT on bad debts for the goods or services that you have supplied as long as you meet all the conditions. You may claim relief whether the payment due to you was in money or in goods or services to be provided to you in a barter arrangement.
| 1. | You must already have accounted for the VAT on the supplies and paid it to Customs & Excise; |
| 2. | You must have written off the debt in your day to day VAT accounts and transferred it to a separate bad debt account; |
| 3. | The value of the supply must not be more than the customary selling price; |
| 4. | The debt must not have been paid, sold or factored under a valid legal assignment. |
| 5. | The debt must have remained unpaid for a period of six months after the later of the time payment was due and payable and the date of the supply; and |
| 6. | f the goods were supplied before 19 March 1997, ownership must have passed to your customer or through the customer to a third party. |
| 7. | For supplies made to a VAT registered customer between 26 November 1996 and 31 December 2002, you must send a notice to them. A copy of the notice must also be retained. |
Note: If you account for tax under the cash accounting scheme or under one of the retail schemes which allows you to adjust your daily gross takings for opening and closing debtors, you are only paying VAT on the amounts you have actually received from customers, so bad debt relief is unnecessary.
When can I claim bad debt relief?You must wait at least six months from the later of when payment was due and payable or the date of supply. You cannot claim on a return for an accounting period earlier than the one in which you become entitled to the relief.
For supplies made after 1 May 1997, you must claim within three years and six months of the later of, when payment is due and payable or the date of supply.
How do I claim bad debt relief?To claim a refund you should include the amount of the VAT you are claiming in Box 4 of your VAT return, which covers the date when you fulfil the conditions to make a claim.
Do I have to notify my customer that I am making a claim?The changes remove the requirement for traders to issue notification letters to supplies made after 31 December 2002.
However, claims covering supplies made between 26 November 1996 and 31 December 2002 to a
VAT registered customer require a notification letter to be sent. You must send a notice to your customer within seven days from the date you make your claim. The date a claim is made is the date you send Customs the VAT return including the claim.
The removal of this requirement is key as previously, by sending such a letter, you were saying to your customer “no need to pay any more”.
The notice must contain all the following information:[bulletted list]
the date of issue of the notice;
the date of your claim to bad debt relief;
the date and number of any VAT invoices issued for each supply to your customer which is included in your claim;
for each relevant supply the amount which has been written off as a bad debt; and
The amount of the claim, except where the claim is for a supply accounted for under a margin scheme.[/list]What should the notification look like for claims for 26.11.96 to 31.12.02 debts
Your notice must contain all the details.
Will my customer keep the VAT he may have claimed on my invoice?
No, from 1.1.03, if you have a debt on which input VAT has been reclaimed but remains unpaid for more than 6 months, then you must now effectively write back this input VAT unit it is paid.
If you have any queries regarding this article please contact Steve Cook, Partner steve@nunn-hayward.com 
