How do I reclaim the VAT on bad debt write offs?

If you use the UK Standard VAT scheme or Flat Rate VAT scheme you can reclaim the VAT paid on sales invoices which are classed as bad debts as long as the HM Revenue & Customs (HMRC) bad debt relief requirements are satisfied. These include the following stipulations:

• You must already have accounted for the VAT on the supplies and paid it to HMRC
• You must have written off the debt in your day to day VAT accounts and transferred it to a separate bad debt account
• 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

There are several other requirements which can be found on the VAT notice HMRC Reference: Notice 700/18. If you're unsure if you can reclaim the VAT or not please refer to the HMRC National Advice Service Help line on 0845 010 9000, contact your local HMRC office or visit their website at www.hmrc.gov.uk

NOTE: If you use the UK VAT Cash Accounting scheme, you only make payments to HMRC for VAT that's already been paid to you. In this situation you haven't received payment and accounted for VAT, therefore there's nothing to reclaim.

To enter a journal

1. Nominal codes > Journal entry > complete the boxes as required.
2. Save > Close.

To reclaim the VAT on a written off sales invoice

When you write off a sales invoice using the Write Off, Refunds and Returns Wizard, Sage Accounts posts a credit note for the gross amount of the invoice to the Bad Debt Write Off nominal code, this debits the nominal code and uses the non-vatable tax code.

Therefore the VAT paid on the sales invoice isn't reclaimed. To reclaim the VAT, post the following journal:

*These boxes are mandatory.

NOTE: The date used should be a date when the requirements for bad debt write off as above have been satisfied, for example, over six months since the date of the invoice or date of supply.

This journal reduces the debit balance on the Bad Debt Write Off nominal code and posts it to the Sales Tax Control Account. This value appears in box 4 of the VAT Return, VAT reclaimed on purchases.

The reason this appears in box 4 is because JD transactions posted to the Purchase Tax Control or Sales Tax Control, with a VATable tax code, are automatically picked up in box 4.

This is in line with How to claim bad debt relief on HMRC's website, www.hmrc.gov.uk/vat/managing/reclaiming/bad-debts.htm

To repay the VAT claimed on written off sales credits

If you write off a credit note using a non-vatable tax code then the VAT reclaimed on the credit has to be repaid. Bad debt conditions do not apply to the write off of credits, the VAT should be paid on the next VAT Return.

Post the following journal:

*These boxes are mandatory

This increases the debit balance of the Write Off Nominal Code and posts the corresponding credit to the Sales Tax Control Account. The value appears in box 1 of the VAT Return.

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