VAT On Bad Debt

Credit note used to clear customer account included VAT

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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? 

Replies (17)

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By Truthsayer
03rd Nov 2020 17:18

Strictly speaking you should follow your own suggestion, but in your shoes I would just leave it as it is. Nobody is losing out.

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By paulhammett
03rd Nov 2020 17:21

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.

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Psycho
By Wilson Philips
03rd Nov 2020 17:27

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.

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Replying to Wilson Philips:
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By Sarahjx
03rd Nov 2020 19:57

The invoice was for 11.5k inc VAT. Our invoices are raised on the day of delivery and paid upfront by card. In this case the invoice was raised and paid for in January. However, it turns out the card used to pay was investigated as a fraudulent transaction and so the money we received originally for the invoice was debited from our account. It was probably assumed that from this it’s classed as a bad debt and so an internal credit note was raised internally in Feb and the balance on the account was cleared and moved to bad debt.

It is only due to the MD asking me to reclaim the VAT due to it being over 6 months later, that I have uncovered the fact the credit note raised should have been zero rated. But it also raises the question of the fact it was less than 6 months after the debt occurred that technically (although incorrectly) the vat was reclaimed.

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By OldParkAcct
03rd Nov 2020 18:26

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.

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By Paul Crowley
03rd Nov 2020 18:41

I take it person asking you did not understand the credit note

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Replying to Paul Crowley:
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By Sarahjx
03rd Nov 2020 19:46

I do understand the credit note. It has cleared the balance on the customer account and moved it to bad debt. However, it has been done with VAT and I believe it should have been zero rated. As the debt was not 6 months old at the time of the credit note being raised, I am questioning the fact that I cannot reclaim it again without resolving the old credit note or as the VAT was for less than 10k whether it could be left as is and no need to reclaim.

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RLI
By lionofludesch
03rd Nov 2020 18:48

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.

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Replying to lionofludesch:
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By Sarahjx
03rd Nov 2020 19:49

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.

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Replying to Sarahjx:
Psycho
By Wilson Philips
03rd Nov 2020 19:55

If you’re not going to answer all the requests for pertinent information, I’m out.

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Replying to Wilson Philips:
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By Sarahjx
03rd Nov 2020 20:00

I have answered all the questions that have been asked. But that’s your decision.

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Replying to Sarahjx:
Psycho
By Wilson Philips
03rd Nov 2020 20:23

Only after I made the point.

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Replying to Wilson Philips:
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By Sarahjx
03rd Nov 2020 20:40

I think you will find I had responded to others before your “comment”.

I will not be held responsible for the delay in responding to the comments on my post when I have valid reasons for not being able to respond. I have responded as soon as I possibly could.

If my response times are not suitable for you, then please do not trouble yourself with providing any advice.

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Replying to Sarahjx:
RLI
By lionofludesch
03rd Nov 2020 22:44

Quote:

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

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By the_drookit_dug
03rd Nov 2020 20:52

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'.

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By tom123
04th Nov 2020 12:30

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.

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Replying to tom123:
RLI
By lionofludesch
04th Nov 2020 12:45

Quote:

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.

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