What is bad debt relief for VAT and how is it claimed?
Bad debt relief allows a VAT-registered supplier to recover output VAT that was paid to the tax authority but has not been received from a customer who has defaulted on payment. The supplier originally paid output VAT on the invoice; when the customer proves unable to pay, the supplier can reclaim that VAT. Conditions include minimum non-payment period (typically 6 months to 1 year), written off as bad in accounts, and the customer must adjust their input VAT if they claimed it.
What conditions must be met to claim bad debt relief?
Bad debt relief conditions in EU jurisdictions: (1) The debt must have been outstanding for a minimum period (UK: 6 months from invoice or original due date; Germany: 1 year after payment was due); (2) The debt has been written off in the claimant's accounts as uncollectable; (3) All reasonable recovery steps have been taken; (4) The buyer must reduce their input VAT claim if they claimed it; (5) The claimant was a VAT-registered business at the time of supply.
Frequently Asked Questions
- What happens if a customer subsequently pays after bad debt relief has been claimed?
- If a customer pays an invoice for which the supplier has already claimed bad debt relief, the supplier must repay the recovered VAT to the tax authority. The payment received reverses the bad debt situation. Similarly, if the customer had reduced their input VAT claim as required and later pays, they can re-claim the input VAT. The tax authority may charge interest on the late repayment if the business does not report the recovery promptly.
- Can bad debt relief be claimed on invoices to related parties?
- Bad debt relief on related-party invoices is subject to enhanced scrutiny because the arm's length commercial enforcement of debts may be questioned. If a parent company writes off a debt owed by a subsidiary without demonstrating genuine commercial collection attempts, the tax authority may challenge the relief claim. Tax authorities look for evidence that the debt is genuinely irrecoverable rather than being written off as a tax planning measure.