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HMRC internal manual

VAT Bad Debt Relief

Repayment of relief when subsequent payments received

Regulation 171 deals with repayment of a refund, where a claimant has received a refund upon a claim and a payment for the relevant supply is subsequently received or attributed to the relevant supply by virtue of regulations 170 or 170A. If a claimant receives a payment after having already claimed bad debt relief, he is required to repay that element of the claim covered by the subsequent payment. This is calculated as follows:

  • VAT refunded as a result of the claim
  • x amount of payment received
  • ÷ amount of outstanding consideration at the time of the claim.

Example using the scenario in VBDR2300 where a payment of £500.00 is received after the claim has been madeFirstly you need to allocate the payment of £500 to the appropriate supplies in time order.

Supply 02 184.14
Supply 03 78.36
Supply 05 237.5

Only supplies 02 and 05 were included in the claim for bad debt relief, as 03 is zero-rated.

The amount to be repaid is therefore

114.93 multiplied by (500 minus 78.36) divided by 771.64

equals 114.93 multiplied by 421.64 divided 771.64

equals 62.80.

Where bad debt relief has been claimed and the bad debt has been subsequently assigned to a third party, who then receives payment from the debtor, none of the relief has to be repaid, unless that assignee is a connected person as laid out in Regulations 171(6) & (7). The ‘connected person’ test is based upon the definition in section 839 of the Income and Corporation Tax Act 1988 (see V1-12 Valuation paragraph 5.3for detailed guidance on application of test).

This would mean that where

  • bad debt relief has been claimed prior to assignment of the debt,
  • the assignee is a person to whom the claimant is connected, and
  • the assignee subsequently receives payment from the debtor,
     the claimant must adjust their claim . This applies to debts assigned on or after 11 December 2003.