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HMRC internal manual

VAT Bad Debt Relief

From
HM Revenue & Customs
Updated
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Making a claim: How is bad debt relief calculated on supplies made under a margin scheme?

From 1 May 1997, bad debt relief can be claimed on supplies made under margin schemes for second-hand goods, works or art, antiques and collectors’ items, subject to a maximum of the VAT on the margin. If the debt is equal to or less than the profit margin, bad debt relief may be claimed on the VAT fraction of the debt. If the debt is greater than the profit margin, bad debt relief is limited to the VAT fraction of the profit margin, since this is the amount of VAT that will have been paid to us. Where a notice is required to be sent to the business’s customer following a claim, it does not need to show a breakdown of the VAT for supplies made under a margin scheme. The example below shows the amount of bad debt relief that will be allowable for supplies under a margin scheme.

Example

If you:
 

purchased goods for £400
   
and sold them for £500
margin on which VAT is paid to us is £100.
If the customer pays £350
then the debt is £150 (which is greater than the margin).
so bad debt relief is VAT fraction of £100 (margin);
but if customer pays £450
then the debt is £50
so bad debt relief is VAT fraction of £50 (debt).

You can find further details in Notice 718 Margin schemes for second-hand goods, works ofart, antiques and collectors’ items.