VAT flat rate scheme and bad debts

If you use the flat rate cash-based turnover scheme you may still be due a VAT reclaim even though you will not have paid a VAT contribution to HMRC.

Section 14 of the VAT Notice 733 spells it out:

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&id=HMCE_CL_000345&propertyType=document#P633_59475

The following is extracted from HMRCs notice:

If you use the cash turnover method of accounting you may be eligible for bad debt relief if:

  • you have not been paid by your customer and it has been six months since you made the supplies
  • you have not accounted for and paid tax on the supply
  • you have written off the debt in your accounts.

If you meet all these conditions, your claim will be for the difference between the VAT you charged to your customer and the amount you would have declared to us had you been paid. As with businesses that use the basic and retailer’s methods, this is because your flat rate takes account of input tax that you would otherwise have been entitled to, if you had been paid by your customer.

You can make the adjustment as follows:

  1. Identify the VAT in the unpaid supply – eg Total price = £1,200
    VAT= £200
  2. Calculate the VAT that would have been paid under the flat rate scheme if your customer had paid you – £1,200 × (say) 12% = £144. That is the total owed (including VAT) multiplied by your flat rate scheme percentage.
  3. Subtract the sum of step 2 from the sum of step 1 – £200-£144 = £56
  4. Step 3 is your special allowance under the flat rate scheme. Include it in your VAT account in your next return.

Note: if you apply for bad debt relief on a supply made while using the FRS you should make the adjustment as above, even if you have withdrawn from the scheme.