I have been asked to reclaim VAT for a bad debt from Feb this year.
In Feb (my horrendous predecessor) has raised a credit note for the full amount to bad debt. However, the VAT has been included at 20% not marked as "no vat". So it has been reclaimed on the Feb VAT return as a credit but shouldn't have been. So if I do the Bad debt VAT relief. It would be claiming the VAT again. What do I do with the clearly wrong credit note? Do I issue an invoice to reverse it and reclaim the VAT correctly?
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Strictly speaking you should follow your own suggestion, but in your shoes I would just leave it as it is. Nobody is losing out.
Journalling the bad debt rather than raising a credit note is the usual way of accounting for bad debts. Anyway, it would seem that the vat on the bad debt has already been reclaimed so there is nothing further for you to do.
How much is involved? How long after the invoice date was the credit note raised? (Looks like same month, but if that’s the case why did the debt become bad in such a short space of time? Are you sure that it wasn’t a valid credit note?)
I’m tempted also to say do nothing, but it might depend on the facts.
The credit note was raised in February, but when was the original invoice? If it was 6 months overdue in February then the VAT has been reclaimed in the correct period so there in nothing to adjust.
If the correct period for claiming the bad debt relief was not February and the VAT involved is more than £10k, then in theory you need to declare the incorrect claim, repay the VAT and claim the relief again, either on another misdeclaration form if the correct period for claiming it has already been filed or on the current return if it falls in that period. In practice no one will be interested in the timing of the claim being one or two VAT periods out.
Was the credit note issued ? That is, sent to the debtor ?
If not, what is needed is an adjustment for the VAT on the credit note to be repaid and bad debt relief to be claimed. Net effect £0.00, no adjustment on the return, just keep a note on fle.
Hard to be precise about procedure with so few facts. Inevitably, it's based on my understanding of precisely what happened.
No the credit note was internal only and was to move the balance of the customer account to bad debt. It was done less than 6 months after the debt occurred though. Which makes me question whether I should do something about it.
Well, the credit has been claimed too early but there are worse things.
What you do need to do is write to the debtor, informing him that you've claimed bad debt relief and that he should withdraw his claim for input tax.
There may be a case to say that there was no supply ab initio, as your company is not in business to be stolen from. Probably a pointless debate as the VAT question has been resolved by another route
Given nothing has been sent out externally, that no tax has been overclaimed, and that the error was less than £10k, accounting-wise I'd do absolutely nothing.
Put a note on your VAT file, and if it's really playing heavily on your conscience, you could always send a letter to HMRC disclosing what's happened - you'll likely receive an acknowledgement letter from them which politely states 'whatever'.
If a debt has gone bad, I would be more concerned about overlooking the idea of claiming the VAT back, than getting the timing wrong.
To a PP saying journals are the way this is done - some kind of sales ledger transaction will be required in order to put the SL right.
The danger is that you write the whole balance off the sales ledger, intending to amend VAT on a later return, and in fact never do this.
If a debt has gone bad, I would be more concerned about overlooking the idea of claiming the VAT back, than getting the timing wrong.
To a PP saying journals are the way this is done - some kind of sales ledger transaction will be required in order to put the SL right.
The danger is that you write the whole balance off the sales ledger, intending to amend VAT on a later return, and in fact never do this.
There are, no doubt, a zillion ways to do this. Personally, I wouldn't write it off until the six months were up but, if I needed to, I'd write off the net and leave the VAT showing as a debtor - because I know that, eventually, I can get that back from HMRC.