VAT refunds if your customer won’t pay

Many business owners feel like all they do is chase up customers on their invoices. When you’ve provided goods or services, you deserve to be paid. But when they refuse, or if your client goes bust, the chances of getting what you’re owed are slim.

This can greatly affect your cashflow, but you don’t need to be completely out of pocket when your invoices aren’t paid.

Choose the right VAT system for your business

Cash Accounting Scheme

Does your company turn over less than £1.35million each year? Do you send over 30, 60, or 90-day invoices? If so, you should be on the cash accounting scheme.

When your business doesn’t take payment when an order is placed, there is always a chance of your customer taking your product or service but not paying. This can have an extremely damaging effect on your company’s cashflow with many expenses going out but no payment coming in. You’ll also still be liable to pay the VAT on top of invoices you’ve issued that have gone unpaid and wait months before you have the chance to reclaim it.

The cash accounting system, unlike the standard VAT system, means you only have to pay VAT on invoices which have actually been paid. You don’t even need to ask HMRC to switch to this scheme – just talk to Simon Cooper.

Flat VAT Schemes

HMRC launched the flat VAT scheme to make working VAT out simpler for the companies they collect from. The flat rate pulls in exactly the same amount as the standard VAT scheme for Revenue and Customs but means working out your bill is a lot less work.

Under this scheme, you would not be able to claim back the VAT on goods and services your business buys (input VAT). Instead, you would pay a pre-determined percentage of your turnover and VAT every quarter.

Say you invoice a customer for £1,000 + VAT, so £1,200 in total. You would keep 13% (if that was your flat rate) of the invoice for your quarterly VAT bill, putting aside £156.

Then if your customer failed to pay, you could subtract the £156 that you would have given HMRC from the £200 VAT on the invoice. You would then be able to claim back that £44 on your next VAT return as a special allowance.

When can I make a claim?

To claim a bad debt refund, certain criteria must be met.

If the invoice is more than 6 months overdue for payment, has been officially written off in your accounts, and the output VAT on the invoice has been declared and paid to HMRC on a VAT return, you can make a claim.

Records to keep – even after your claim

Once you’ve lodged your bad debt claim, you still need to keep your evidence organized. HMRC may enquire about your request up to four years after you make your claim. Make sure you file:

  • A copy of the VAT invoice you’re claiming relief on
  • How much you are writing off as bas debt
  • The VAT on which you have made the claim
  • The total amount of VAT you charged on the sale
  • The customer’s name
  • The invoice number
  • The invoice date
  • Any part-payment received, shown separately on each invoice
  • The VAT period you claimed relief in
  • The VAT period in which you originally paid the VAT

What happens if your customer eventually pays?

If you’ve already received your VAT refund, but your customer finally pays you what they owe, you’ll need to let HMRC know.

Just put the total you’re repaying in Box 1 of you VAT return. If your customer pays you the full amount, you pay back the VAT to HMRC in full. For a part payment, you would need to pay the VAT back on the part payment.

Talk to your accountant 

If you want to speak to us about all aspects of credit control and VAT, please call us on 01932 704 700, or email to speak to your usual contact partner.

Leave a Reply