Q: I invoiced a customer for goods costing £10,000 in September 2011 and I have not been paid.  I have accounted for output tax to HMRC. Can I issue a credit note to reclaim the unpaid VAT? 

A: You cannot issue a credit note to a customer for unpaid VAT simply because you have not been paid for a supply of goods.  A credit note is only issued where there is a genuine mistake or overcharge in the value of a supply.

However, if a business has made supplies of goods or services to a customer and has not been paid, it can claim bad debt relief in respect of the unpaid VAT provided that certain conditions are met. The relief depends upon the supply being written off as a bad debt in the books of the company and a period of six months having elapsed since the date payment became due. 

Before making a claim a business must meet the following conditions:

• You must have already accounted for output tax on your supplies and paid it to HMRC;
• The debt is written off in your day to day VAT records and is transferred to a separate bad debt account;
• The value of the supply must not be more than its customary selling price;
• The debt must not have been paid, sold or factored under a valid legal assignment;
• The debt must have remained unpaid for a period of six months after the later of when payment was due and payable and the date of the supply.

If all of the above conditions are met, and the six months have passed you can make a claim for bad debt relief. Any claim must be made within four years and six months of the later of, when payment is due and payable or the date of supply.
 
To claim a refund you include the VAT in box 4 of the VAT return covering the period in which you can make the claim.
You should keep a record of the claim being made so that if HMRC check your claim you can show them how it was calculated. 

The records should include:

– A copy of the VAT invoices for the supplies on which you are claiming a refund 

– A separate bad debt account showing the:

(a) amount you have written off as a bad debt;
(b) amount of VAT you wish to claim as bad debt relief;
(c) VAT period in which you have claimed a refund;
(d) total amount of VAT charged on each supply;
(e) VAT period in which you originally accounted for;
(f) payment received for each supply;
(g) name of your customer; and
(h) date and number of the invoice to which the bad debt relates.
If following a claim, the bad debt is paid; any refund received from HMRC must be repaid to them.

For any further information on any of the issues outlined in this piece, please call the Advice Service on 01455 852555.