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VAT & Bad Debt Relief: Am I £12,000 in Pocket?!

Hi All.

I raised an accounts receivable invoice on the 31 May 2012 for £75,000 + £15,000 VAT (£90,000).

I was paid £15,000 immediately, which simply covered the VAT element (paid to HMRC). £75,000 remains in accounts receivable on our balance sheet.

I now feel it's unlikely that the full £75,000 will be paid before 30 Nov 2012 (which is 6 months from the date the invoice was raised), as I've not received a further penny, despite promises of £500 a week or so ago!..

However, I am not incurring any costs until partial payments are made to clear-down the £75,000. E.g. Assuming tomorrow I was paid £1,000, I'd go ahead and purchase materials to supply £1,000 worth of services. The original invoice I raised clearly states "prepaid [XYZ]".

So therefore I feel writing off £75,000 as a bad debt and reclaiming [VAT] bad debt relief of £12,000 (20% of the £75,000) would be incorrect because I have not incurred any costs.

Surely if I did this, I'd be £12,000 in pocket, yet the P&L would be of no net gain/loss because of this invoice, because I understand when reclaiming [VAT] bad debt relief, the amount written off must be transferred to a separate 'bad debt' account. The only thing I would need to do is reverse the cost of sales accrual I did in May when the sale was raised.

Also, do I need to make the customer aware when I am writing the invoice off? E.g. Could I write it off now if I wished? I understand I'd need to wait until 30 Nov 2012 to reclaim [VAT] bad debt relief. We have no Ts & Cs regarding when an invoice can or cannot be written off.

I simply want him to pay the remainder, or I'll write it off now.

Thanks in advance.

P.S. We are on the accrual VAT scheme.

Replies

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14th Sep 2012 15:57

Pro Rata

I believe HMRC wish you to pro rata a receipt against the Goods value and the VAT so the £15,000 didn't cover the VAT but 1/6th was VAT and 5/6ths was goods value.

Try that and see if you are better off.

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14th Sep 2012 16:18

Thanks for the reply.

I have read that, but I have still paid £15,000 to HMRC because when the £90,000 invoice was raised, £15,000 of it was VAT. This is partly why I ensured I received at least a £15,000 payment from him to cover my immediate VAT liability.

I understand the pro-rata method, so I cannot reclaim the VAT element (£3,000) of the part payment (£15,000).

I'm just a bit stuck with what to do with the £75,000 outstanding, and whether I can reclaim the VAT element (£12,000) of this if I write it off. It just doesn't seem right to me?

The customer would have put the entire £90,000 through his books and no-doubt reclaimed £15,000 from HMRC because I would have paid it this end. So surely if I reclaim bad debt relief of £12,000, HMRC are out of pocket, and I'm in pocket. In theory, the customer should then repay the £12,000 to HMRC he's wrongfully reclaimed, as he's only technically paid me £3,000 of VAT due to sending me a £15,000 part payment of a £90,000 invoice. HMRC should then be cash neutral.

I guess I could THEN send him the £12,000, but should I have to?! Because as far as he's concerned I could have incurred costs on his invoice, regardless of whether he's used my services or not.

I'd be keen to know what do I need to make him aware of, if I were to write off this invoice. E.g, Do I need to send him something in writing?

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By zameer
14th Sep 2012 16:19

you are due the  following

you are due the  following refund from hmrc:

15000  - (15000/120*20) = £12,500

write off the remaining £75,000(inc vatb)

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By Suntree
14th Sep 2012 16:19

Irrelevant

 

 You paid VAT over, and  under bad debt provisions can claim it back. Supply of services is irrelevant at this point.

 

  I believe your view is driven by revenue recognition which in fact cannot be recognised until services are provided.

  For VAT purposes matters revolves around tax points: basic tax point and actual tax point. Basic tax point is actual provision of services or supply of goods, actual tax point is date of payment or date of invoice. If these differs actual tax point almost always prevails.

In your case date of invoice was tax point and you were obliged to account for output VAT on it which you did.

  Since invoice remains unsettled after 6 months and provided it’s written off in your books to bad debts, you can claim bad debt VAT relief.  Amount of bad debt claim in fact would be £12,500 on 75K.

 

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By Suntree
14th Sep 2012 16:25

Let HMRC worry

 

 

Up to December 2002 you would have been obliged to inform customer of bad debt claim.

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14th Sep 2012 17:36

Shows why accountants are needed
The sheer lack of understanding you have of the situation clearly shows why some people should not do their own books and should hire bookkeepers and accountants. While you used the whole £15k to pay HMRC you cannot say you've only been paid the VAT element of an invoice you have received 1/6 of the total invoice value so if you write off the rest HMRC are entitled to 20% of 1/6 I.e. 90k/6x20%=2.5k you are entitled to 12.5k back. If the customer does end up paying you will then have to reverse the write off and pay the 12.5k back to HMRC

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14th Sep 2012 17:35

On another point
If your not actually going to do any work for the client you should really raise a credit for the 12.5k + VAT (2.5k) you received and repay the customer 15k then no one is in or out of pocket

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14th Sep 2012 17:49

Thanks for all the feedback guys. I appreciate the points outofpractice, but I'm doing my best to learn! This is one scenario that particularly got me stuck.

One final question I had was that this invoice was never recognised in the P&L because we put prepayment invoices into an 'Income in Advance' current liability (balance sheet) account and journal income into the P&L when it's actually earnt.

HMRC mention the write-off must be transferred to a bad-debt account - what do I do here?

I can think of the following, but it escapes any type of bad-debt account?

CR 'Accounts Receivable'? £75,000
DR 'Income in Advance' £62,500
DR 'VAT' £12,500

Thanks.
 

 

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14th Sep 2012 17:56

Sort of
Its
Cr accounts receivable 75k
Dr bad debt account p&l 75k
Dr income in advance 62.5k
Cr bad debt account p&l 62.5k
Dr VAT 12.5k
Cr bad debt account p&l 12.5k

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17th Sep 2012 20:14

6 months from due date

Small point but the bad debt relief is only available 6 months from the due date not the invoice date.  Of course these might be the same, but worth checking.

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17th Sep 2012 22:29

And don't forget...

Bad debt relief is MANDATORY - you have no choice in the matter, you MUST reclaim this sum - and your client is under a mirror image obligation - having reclaimed the whole the sum of VAT they must now account for the corresponding sum on the bad debt to HMRC.  If they then pay you must account for VAT on what you receive and they will get relief for what they pay.  As to the accounting entries if you don't know what entries to make I would suggest you should not call yourself an accountant but employ someone who knows what entries to make to do it for you.  Of course when I did my training we actually had to make the various entries and I suppose these days that is no longer required...

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