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VAT registration and bad debts

How do bad debts affect registration turnover?

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Hi all

How do bad debts affect the VAT registration point?  Or do they at all?  Moot in this client's case as they won't exceed the threshold regardless, but it got me thinking.

Their turnover is (say) £80,000.  However they had bad debt relief last year of £10,000, but they all suddenly paid, so now they have to include that as income (or is it a negative bad debt... eep I don't recall the last time I had a repaid bad debt...) for the year.  But presumably the VAT turnover remains £80,000?

Or say their turnover was £90,000 and they identify bad debts of £10,000, are they required to register?  Presumably so, as their turnover exceeds the threshold, the £10,000 relief being a debt.  Which would then in turn mean the other scenario above would be a no, as that would be double counting.

I think I've talked it out and got my own answer there haven't I...  But some agreement would be welcomed!

Replies (7)

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Hallerud at Easter
By DJKL
30th Jun 2020 09:35

HMRC notice indicates bad debts are a box 4 adjustment so not sure re turnover and registration/deregistration.

https://www.gov.uk/guidance/relief-from-vat-on-bad-debts-notice-70018

2.4 How to claim bad debt relief
To claim a refund you should include the amount of the VAT you’re claiming in box 4 of your VAT Return which covers the date when you fulfil the conditions to make a claim.

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Hallerud at Easter
By DJKL
30th Jun 2020 09:38
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Hallerud at Easter
By DJKL
30th Jun 2020 09:45

You cannot imho rely on Bad Debts to lower turnover re registration threshold as at the point the sale is made that debt is not bad so needs accounted for in full, it only subsequently, after six months may become bad.

I can also not find anything to suggest a bad debt reduces turnover, a bad debt in normal accounting being an expense, so why ought it reduce turnover?

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Hallerud at Easter
By DJKL
30th Jun 2020 09:56

http://www.legislation.gov.uk/ukpga/1994/23/schedule/1

Subject to sub-paragraphs (3) to (7) below, a person who makes taxable supplies but is not registered under this Act becomes liable to be registered under this Schedule—
(a)at the end of any month, if [F2the person is UK-established and] the value of his taxable supplies in the period of one year then ending has exceeded [F3£85,000]; or

(b)at any time, if [F4the person is UK-established and] there are reasonable grounds for believing that the value of his taxable supplies in the period of 30 days then beginning will exceed [F5£85,000].

4Scope of VAT on taxable supplies.

(2)A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.

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ALISK
By atleastisoundknowledgable...
30th Jun 2020 10:05

“ Or say their turnover was £90,000 and they identify bad debts of £10,000, are they required to register? Presumably so, as their turnover exceeds the threshold, the £10,000 relief being a debt. Which would then in turn mean the other scenario above would be a no, as that would be double counting.”

This.

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Quack
By Constantly Confused
30th Jun 2020 10:34

Thanks both, it felt like it wouldn't affect registration, but until I talked it out I don't think I was sure (and now you've both agreed I feel certain).

As a related question, I know where bad debt relief goes on the tax return, there being a box for it and all, but where does the subsequent income on a debt that turned out to be good go? I think I've always put it to turnover to avoid a negative bad debt box, but is that correct?

Clearly no tax consequence either way, but I like to be accurate.

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Replying to Constantly Confused:
ALISK
By atleastisoundknowledgable...
30th Jun 2020 14:27

I’d put it as a negative bad debt. It’s where it goes in the accounts, so it should follow through.

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