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HMRC internal manual

VAT Cash Accounting Scheme Manual

From
HM Revenue & Customs
Updated
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Cash accounting scheme: Leaving the scheme: Claiming Bad Debt Relief

Claiming Bad Debt Relief from 1 April 2004

Remember that the cash accounting scheme gives automatic bad debt relief. With effect from 1 April 2004, a new regulation, Regulation 64A, allows businesses to claim bad debt relief in the period in which they leave the scheme:

64A Where a person accounts for and pays VAT in relation to a supply in accordance with regulation 61(3) or (6) or 64(2), he shall be treated for the purposes of section 36(1)(a) of the Act as having accounted for and paid VAT on the supply in the prescribed accounting period in which he ceased to operate the scheme.

All businesses leaving the scheme after 1 April 2004 may make an adjustment to the amount of outstanding tax for genuine bad debts, provided the adjustment is fully documented in their business records and accords with all the other rules of the Bad Debt Relief scheme ie:

  • it is 6 months after the payment was due and payable or, if later, 6 months after the time the supply was made;
  • there is evidence that the debt has been written off in the business accounts.

Those businesses who have opted to take the six month option in which to account for outstanding VAT incurred while they were using the scheme can adjust for any remaining bad debts in the VAT return for the period at the end of the six months.

Claiming Bad Debt Relief prior to 1 April 2004

Prior to 1 April 2004, the concession described above applied only to businesses leaving the scheme voluntarily or because they had exceeded the exit limit. These businesses could make an adjustment to the amount of outstanding tax for genuine bad debts, provided the adjustment was fully documented in their business records and was in accord with all the other rules of bad debt relief.

Businesses that had entitlement to use the scheme withdrawn from them were required to account for outstanding VAT in the period in which they left the scheme and claim bad debt relief in a subsequent period.