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HMRC internal manual

VAT Bad Debt Relief

HM Revenue & Customs
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Introduction: Exclusions from relief

  1. There is no entitlement to relief where the value of the supply is more than its open market value.
  2. When a debt has been paid, sold or factored under a valid legal assignment (VATFIN3200 contains detailed information concerning factoring of debts), there is normally no entitlement to bad debt relief. If the debt has been temporarily assigned, bad debt relief cannot be claimed until it has been reassigned to the business that made the supply. Where any reassignment occurs under a factoring agreement, entitlement to bad debt relief will be re-established.
The initial assignment of the debt to the factor is not seen as a supply. Any payment made by factors or others to the trader in connection with the assignment is an advance or loan on which the trader will be liable to an exempt interest charge. This is not consideration for the original supply to the customer and will not reduce the amount of relief that original suppliers may subsequently claim.  
For example, a trader makes a supply to a customer (£100 + VAT). Trader accounts for £17.50 output tax. Trader assigns debt to factor and receives £90 in total. As debt is assigned, the trader has no entitlement to bad debt relief. Subsequently:

* the factor may not be able to collect anything from the customer. The entire debt may be reassigned to the original supplier, who would then be entitled to bad debt relief in full. This entitlement is not affected by whether the trader retains the £90 from the factor. This is a loss to the factor.
* The factor may collect part payment (£70). The balance of £47.50 still exists as a debt and can be reassigned to the original supplier. The original supplier may then claim relief on the part of the debt reassigned. As above any factor payment retained will not effect the claim.
* The factor may collect in full from the customer. In this case there will be no debt to reassign.

VBDR4100 deals with assignment of debts between connected persons.

  1. Bad debt relief is not available to businesses that use the cash accounting scheme or one of the retail schemes that allow the daily takings total to be adjusted for opening and closing debtors.
  2. Where import agents have paid import VAT on their customer’s behalf and are then not paid by their customers, there is no entitlement for the agent to claim bad debt relief in respect of the unpaid import VAT. (If the agent is not paid for the services he provides there may be an entitlement to bad debt relief subject to all conditions being met).