We were reviewing a client’s purchase and sales ledgers. We noted a number of invoices where payment was outstanding for more than 6 months.
What are the implications?
In the sales ledger, where a payment has not been made within 6 months of the due date (not necessarily 6 months after the invoice date), the taxpayer is entitled to make a Bad Debt Relief claim.
Note that VAT Act 1994, s36 creates an entitlement for a Bad Debt Relief, not an obligation. A taxpayer may choose to forego his entitlement, of course. Our advice is to make any bad debt relief claims when doing his Annual Accounts. He will make a provision for bad and doubtful debts, so this presents the perfect opportunity to tidy up.
In contrast …
Where the taxpayer has failed to pay a supplier, the legislation is almost, but not quite, a mirror image. Again, the time limit is 6 months after the due date (Regulation 172G). But Regulation 172H creates an obligation to make an adjustment if payment has not been made.
The taxpayer may opt to make any such adjustments at the time he does his Annual Accounts. But this means running a risk that HMRC don’t decide to make a compliance visit just before he does so. If he has failed to make the adjustment, he will be liable to an assessment plus a penalty. Strictly he should make a check for each VAT Return period, to pick up any unpaid invoices.
The distinction between an entitlement and an obligation is important.
You might also be interested in
Hi, I am a VAT Consultant, part of the team at vatadvice.org We are based in Cambridgeshire. We work largely with charities but also advise a range of commercial organisations.
I have over 30 years experience in VAT, and am currently also a part-time member of the Tax Tribunals.