New Bad Debt Relief Rules

In April 2002 the Chancellor announced a change to the VAT bad debt relief rules. The date for this change was dependant on the Finance Act 2002 becoming law. This happened on July 24th, so what do you need to do now?

Current Rules

Six months

If you have issued an invoice that has not been paid six months after it was due, you can claim bad debt relief on the VAT element. This is done by making an entry in the bad debt relief account and adjusting box 4 of the VAT return. But more importantly you have to write to the debtor informing them of the invoice(s) that you have claimed bad debt relief on and telling them to adjust their input VAT claim accordingly (details can be found in C&E Notice 700/18/97).

VAT visit

It has been a favourite hunting ground for the VAT man to check that the letters have been sent. If not, then he will disallow the bad debt relief claim and charge you interest on top.

Debtor

On the other hand, bad payers could wait until they received a letter from their supplier (informing them that they have claimed VAT bad debt relief) before having to adjust their next VAT return – to repay any Input VAT they had claimed. This was done by making a negative entry in Box 4 of the VAT return.

New Rules

Diary date

However the operative date for the new changes is January 2003.

Sales

As a welcome relief to companies with bad debts, the chancellor has simplified the method of claiming bad debt relief by removing the requirement to send a written notification to the customer. Once the debt is 6 months past the due date for payment you can simply claim the VAT bad debt relief on your VAT return, meaning it’s July 2003 before you can simplify things.

Purchases

The purchaser will now have to monitor payment of invoices because under the new rules once a purchase invoice is six months past payment date he will have to pay back the input VAT he has claimed to the VAT man (until such a time as the debt is cleared) or part of the VAT if he has made a partial settlement.

Warning! Although this is a welcome simplification of the bad debt relief scheme form the point of view of the supplier, it has added complications for purchasers. Debtors will have to ensure that they have systems in place to monitor the payment or part payment of debts, because once they are six months overdue they will have to adjust their input VAT claims. You can be sure that the VAT man will check that this has been done correctly, and if it hasn’t he will assess you for the error plus interest.

Existing bad debts

Transition

Any bad debt relief claims you make before the new system comes in will be dealt with under the old rules and suppliers will still have to issue a written notification to the customer, so keep sending those letters! You can bet that the VAT man will check that this has been done correctly as it will be easy pickings for him you haven’t.

Minor change

There has been one other minor change relating to bad debt relief. It relates to the treatment of payments under hire purchase, conditional/credit sale agreements and confirms an extra statutory concession already in place.

Source

Details of the changes can be found in Budget Notice 37/02 available from VAT offices and can be downloaded form the Customs & Excise website http://www.hmce.gov.uk/.

You still have to wait until January 2003 for the change, meaning from August 2003 you don’t have to send a letter to the debtor anymore. Bad payers, on the other hand will have to automatically amend their VAT returns.