We're building a feature into our software that allows clients to automatically claim VAT relief on written off bills.
One common live scenario is where bills are split Net:VAT between 2 or more payers (Legal insurance work). In a scenario where one payer settles the net amount but the 2nd payer does not settle the VAT and it is written off, I want to be sure the claim would be correct as VAT isn't my strongest topic albeit having a working knowledge.
My understanding is that payments from each payer are treated as a gross payment for the purposes of bad debt relief. So:
Payer 1 owes net of £500
Payer 2 owes VAT of £100
Payer 1 settles £500
Payer 2 defaults.
For the purposes of the VBD relief claim, the payment from P1 is treated as a gross payment inclusive of VAT (so 500/6 = 83.33 VAT attributed to this payment that cannot be claimed), so the remaining £100 VAT can only be claimed at the same fraction (100/6 = 16.67 claimed for VBD Relief).
I think I'm on the right track with this, but any correction/advice would be appreicated!