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Question.
 Bad debts are causing major cash-flow problems for my business, despite my best efforts to get customers to pay me. I have paid VAT to HM Revenue & Customs but I don’t know if I will ever recover all the debts which are owed to the business. Can you give me advice on what I should do?
Answer. Continual late payments and the ability of large customers to decide to pay as and when they want to, can contribute to cash-flow difficulties in any business. At the outset it is therefore very important for all businesses to choose the right customers and be selective about the organisations with which they intend to do business. It is quite possible for a business to be in the position of having to pay over VAT to HMRC while not having received payment from its customers. Bad debt relief allows businesses that have made supplies on which they have accounted for and paid VAT, but for which they have not received payment from their customers, to claim a refund of the VAT from HM Revenue & Customs. In order to make a claim a business must satisfy several conditions however. Firstly, the goods and services must have been supplied or delivered and the VAT in question must have been accounted for and paid. It is only possible to claim back the VAT if six months has elapsed since the date of supply or, if later, the date the customer was due to pay you. It is also important that all or part of the outstanding amount must have been written off in the business accounting records as a bad debt. A claim is made by entering the appropriate amount in Box 4 of the VAT return for the period in which entitlement to the claim arises (or any permissible later period). Businesses making bad debt relief claims must keep records for four years from the date of the claim to show the time and nature of supply, the customer’s name and the amount which remains unpaid. Normally a VAT invoice will show this. The tax authorities will often request this information before approving the repayment of VAT. Where a customer has not paid a supplier within six months of the date of the supply, or if later, the date payment is due, VAT previously claimed as input tax must be repaid. This puts a burden on all VAT registered traders to monitor their transactions to anticipate whether they need to reverse any input tax recovered on goods received from their suppliers. If you have not already implemented a debt collection policy you need to establish one to ensure that you keep control of debt collection and regularly review your debts to determine if VAT can be reclaimed from HMRC on amounts remaining unpaid by your customers.
The advice in this column is specific to the facts surrounding the questions posed. Neither FPM Accountants LLP nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
Email j.burns@fpmca.com |