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Bad Debt relief problems


Business | Articles 

Local newspapers have reported difficulties that businesses have with bad debt relief rules.

With effect from 1 January 2003, the creditor is not required to notify the debtor that he is making a VAT bad debt relief claim. However, there are a number of conditions that apply:

  • he must already have accounted for the VAT on the supplies and paid it to Customs and Excise, thus excluding taxpayers using Cash Accounting;

  • he must have written off the debt in his VAT accounts and transferred it to a separate bad debt account;

  • the value of the supply must not be more than the usual selling price, thus stopping potential VAT avoidance;

  • 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;

  • the debt must not have been paid, sold or factored under a valid legal assignment.

Having fulfilled these conditions, the creditor can reclaim the VAT he has paid. Thus, the first area which Customs & Excise officers check is the fulfilment of these conditions for EACH debt.

The second area of problem is when part payments are subsequently received after relief is claimed, including a claim in liquidation. Essentially, VAT, having been claimed back, has to be repaid on such money received. The visiting officer will check the creditor lists, liquidation correspondence, and the miscellaneous receipts file.

Ideally, the sales/credit control/accounts departments must liaise to ensure that VAT implications of orders, invoices, credit notes, debts, liquidations, etc., are all properly accounted for.

July 2004

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