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!
Replies (4)
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Your thinking is correct. Although in practice one payer pays the VAT, and the other the net amount, from HMRC's point of view, each is a part payment for the supply, so BDR is available on the balance.
Not only are you spot on, it's a major relief to see an OP where you can actually understand (1) what is being asked, (2) why it is being asked, and (3) the ability of the OP to understand any answers. This last happened in 1983.