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HMRC internal manual

VAT Partial Exemption Guidance

Other Partial Exemption issues: bad debts

The bad debt provisions, under s36 of the VAT Act 1994 and the Value Added Tax Regulations 1995 (SI 1995 No 2518) Part XIX, allow suppliers to claim relief from output VAT on bad debts incurred in respect to their customers, provided certain conditions are met.

From 1 January 03, suppliers are no longer required to notify their customers that a claim for relief has been made in respect of unpaid supplies. However, the customers are required to monitor the time they take to pay their suppliers. Six months after the relevant date, they are required to repay input tax if they have not paid for the supplies (Section 26A of the VAT Act 1994).

Where the business is partly exempt, they will be required to make repayment based on the amount of input tax deducted in respect of the unpaid supplies. If the supply relates to an exempt activity and no input tax was deducted, then there will be no input tax to repay. However, if the supply relates to both exempt and taxable activities, the amount of input tax to be repaid is the proportion of input tax deducted based on the partial exemption method in place when the initial deduction made. Further guidance can be found in VBDR.