Can you claim Bad Debt Relief on unpaid invoices?

9th October 2019.

James Salmon, Operations Director.

Could you get VAT bad debt relief when you are not paid?

When you provide goods or services to a customer on credit and raise that invoice, the VAT element has to be paid to HMRC on your next return. No If’s, no buts.

So what happens when your customer fails to pay? Not only are you out of pocket for the costs associated with providing the goods and services, you are also out of pocket for that Value Added Tax the government asked you to collect on their behalf.

Those bad debts can be devastating to your cash-flow and leave you in a hole.

However some relief is available in the form of Bad Debt Relief, which allows you to claim back what you have already paid in the VAT portion of the invoice to HM Revenue and Customs.

Applying for Bad Debt Relief

Before you can apply for Bad Debt Relief, it is vital that you’ve exhausted all your options for recovering the debt, as you will be required to write the debt off in order to claim the benefit.

Bad debt Relief is the final option – you are going to lose out on the principal amount of the invoice, and you are going to have to take a hit on the costs you incurred in providing the sale.

Options for recovery

When it comes to recovering a debt, there are several steps that you can take to try and encourage your client to pay before you turn to Bad Debt Relief.

Amazingly a third of UK Businesses do not even chase late payments – don’t let that be you.

See – A third of UK businesses not chasing late payments

The first will normally include some form of in-house recovery attempts, such as issuing statements, chasing the customer for payments by phone and email and trying to resolve any excuses or disputes raised for non-payment.

see – Overcoming 5 common reasons for disputed invoices
see – Get paid earlier by understanding why late payments happen.

If however your own efforts are ineffective, the next step would be to turn to  debt collection agency (such as CPA) to chase the debt for you.

Often just the knowledge that you have escalated the debt to a third party will be enough to prompt a customer to pay, but if not, a debt collection agency can like CPA can use the experience of its staff to resolve most non-payments.

CPA prides itself on the experience of its staff. The average member of staff has been with us 14 years and the majority of our collection team have decades of experience in the industry. CPA resolves on average, over 80% of the debts referred to us without the need for legal action.

see – Top 10 reasons to select a debt collection agency

The final option for dealing with customers who refuse to pay is to take legal action against them. CPA offers a dedicated legal service to our members with access to retained solicitors who specialise in debt collection.  The normal route would be to attempt to obtain a CCJ (County Court Judgment) that orders them to pay and if necessary, then enforce that action through bailiffs.

Because of the costs associated with such an action, you would want to be relatively certain your debtor had the means to pay before litigating. Paying for a CCJ against an insolvent debtor will only leave you further out of pocket.

You’ve exhausted the options

If however you have gone through the above options and you still haven’t obtained payment, unless you have some specific knowledge or other plan to extract payment, this is probably the time to accept that there is no point  spending any more time or money chasing the debt and cut your losses and write off the debt.

That will then enable you to claim Bad Debt Relief.

Are you eligible?

The first step is to determine if you are eligible. There are a number of conditions that you must meet to claim Bad Debt Relief:

  1. You must have accounted for the VAT on the supplies and paid it to HMRC.
  2. You must write off the debt in your day to day ledger and transfer it to a separate bad debt account.
  3. The value of the supply must not exceed the customary selling price.
  4. The debt must not have been paid, sold or passed to a factoring company.

There are also certain time restrictions on when an application can be made. It must fall at least 6 months after both the payment was due and payable and the date of supply, and within 4 years and 6 months of this date.

How to claim

Once you have checked the above criteria and are certain that you are eligible for Bad Debt Relief, you can calculate your claim.

When making a claim, make sure you have the following records:

  • Copy of the VAT invoice on which you are claiming a refund
  • A bad debt account which shows:
    • The amount you have written off
    • The amount of VAT you wish to claim
    • VAT period in which you have claimed a refund
    • Total VAT charged on each supply
    • VAT period where you originally accounted for VAT on the supply
    • Payment received for each supply
    • Name of your customer
    • Date and number of the unpaid invoice
    • Copy of any notice issued

With all the records in place you can figure out the amount you are eligible for.

If your claim for relief is based on one supply for which you have received no payment, you can claim the full amount of VAT you accounted for and paid.

If you have received part payment, then you are only eligible to claim relief on the VAT that relates to the unpaid portion of the supply. Unless the customer has specified that a payment related to a particular supply and pays for that supply in full, any payments should be allocated to the earliest supply made.

When you have calculated the amount of VAT you can claim relief on, you can make your claim by including this amount in box 4 of your VAT return.

Why not try and avoid bad debts in the first place?

Ideally you would avoid bad debts in the first palce.

To do so it is essential to have credit management systems in place to monitor and check your customers credit worthiness to make sure you only supply on credit to customers who both have the ability and willingness to pay their suppliers on time.

CPA can provide credit reports and a monitoring service to check those customers. We also can chase those tardy payers if they do delay in making payment.

It’s all part of our inclusive membership service.

About CPA

The Credit Protection Association can help!

Formed in 1914, CPA has been providing credit management services to SMEs for over 100 years.

At the Credit Protection Association, we provide first class credit information that can help you avoid being over extended to customers who are at risk. Our monitoring service can flag up warning signs long before the end, giving you the chance to adjust and reduce your exposure. We provide recommended credit limits and credit scores on a traffic light system and can help you set appropriate credit policies for your customers.

We regularly publish lists of the latest insolvencies but by then it is too late. Our credit reports however predict approximately 96% of company insolvencies long before they arrive.

Companies in trouble usually have very bad cash flow and they try to deal with it by delaying payment to their suppliers, increasing your exposure to them.

If you supply on credit, help us help you identify the risks.

Why use a third party collector?

As a third party collector, we can also get your payments prioritised over those who are not as hot on collections. When you customer receives a letter from the Credit Protection Association regarding their outstanding account, they are going to want to get that resolved as a priority. Our overdue account recovery service can get your unpaid invoices to the top of their “to do” list and get your invoice paid.

Over the years we have collected billions in overdue invoices for our customers.

Our debt recovery and credit management services give our members the financial freedom needed to grow and prosper, while our new Late Payment Compensation department could unlock hidden potential and offer the compensation needed to springboard your business to success.

The Credit Protection Association – Prompting Punctual Payments – Ethical, Effective, Efficient, Economical collections

Ready to speak to an advisor?

For help or advice on credit management, entirely without obligation.

Call us today

0330 053 9263

CPA is passionate about late payment

The Credit Protection Association has been protecting smaller firms against poor payment practices for over 100 years.

We are extremely passionate about breaking the late payment culture that holds back the UK economy and threatens many SMEs with cash flow difficulties being the single biggest killer of Britain’s small businesses.

If you were regularly paid late we can help. Those former customers used you to boost their own cashflow, regularly paying you late.

As a result you had extra costs, you had the distraction of having to chase payment, you had opportunity costs because your capital was tied up in their late invoices.

Under little used legislation, you are entitled to compensation for those late payments.

Now you can boost your own cash-flow.

CPA can help unearth the those hidden treasures.

We have the technology to reveal the compensation you are due and we have the extensive experience and expertise to then turn those claims into cash.

Yes, CPA can help you boost your business cash-flow.

Don’t let your bankers control you, contact CPA today.

The Credit Protection Association – Prompting Punctual Payments – Ethical, Effective, Efficient, Economical collections

Read our blog here on how to crack down on the late payment culture.

Read our blog here on how to give late payers the slap they need.

The “Why” of the late payment culture.

New PM should walk the walk and back small firms over late payments

Paying late is “crack cocaine” to big business.

Late payment culture risks “spiraling out of control”

visit our late payment compensation page

See our full blog and FAQ on late payment compensation

Do you realise you could be sitting on a fortune?

Late payments often result in a cash flow crunch and leave SMEs in need of a cash injection.

If you sold B2B on credit then there may be a hidden source of capital you can call on.

If you fancy an bit of extra cash in your business, rather than jumping through hoops with your bank, you could look to uncover the resources from an unexpected source within your own business.

Not many are aware but there could be a hidden fortune within your business, sitting there, just waiting to be uncovered and released.

We can help you uncover the pile of gold, you didn’t even know you were sitting on.

If you trade with other businesses and were often paid late then you could be entitled to significant compensation.

Under little known and under-utilised legislation your business could be due huge amounts in compensation that you didn’t even know about.

Let’s be clear – this is not a way to weaken any customer relationships you value. It is one that identifies who’s been paying late and then recover the potentially significant sums in compensation using Late Payment Legislation from businesses where the relationship has already ended.

You can pick and choose who you want us to follow up – but once we’ve agreed which companies you’d like to pursue compensation from it’s a fast process and there’s no financial outlay to you whatsoever. My team at CPA put its expertise to work to recover the compensation due and fight late payment culture.

That compensation could provide the cash boost your business needed.

But don’t delay, that compensation evaporates if not claimed within six years of the late payment.

How can CPA help?

CPA has developed a unique technology to dig into your accounting records and discover the cash injection you are due by means of compensation. The software does all the hard work. Our software interacts over the cloud with over 300 different software packages, working directly with your accounts package, just so long as it’s stored on a computer.

We recognise that most companies do not have the resources to spend time on the identification and calculation of Late Payment Compensation. Our service can produce an Analyses within just a few days with (usually) less than 30 mins of co-operation from our clients. We work directly with over 300 accounting packages but can also work with bespoke accounts packages. Indeed, speed is essential as the oldest invoices may fall foul of the 6-year time limit.

Once the Sales Ledger Analyses is made available to clients, all that is required is that management decide which commercially sensitive ex-customers to remove from the list and return it to us.

CPA then uses its years of collection experience to explain and recover the Late Payment Compensation Claims. Clients do not handle any part of the recovery process as our team will take all communications from the companies against who the claims has been made. Often, it’s simply a case of explaining the legislation, sometimes we have to go all the way and enforce the legislation through the courts.

The result is that we are realising clients’ claims worth tens and sometimes hundreds of thousands of pounds which, of course, is pure net profit.  You may also be among the recipients of “hundreds of thousands of pounds” should you elect to take advantage of our services.

We do the work, you receive the cash.

If you have supplied goods and services to businesses on credit and were regularly paid late then you could be due significant sums in late payment compensation.

We are talking to companies and unearthing claims in the hundreds of thousands from former business customers who paid them late. Large business customers who abused their power to inflict unfair and sometimes illegal payment practices.

We are helping business owners  who are looking to boost the returns from their business before they retire. We are helping businesses who have lost major clients after years of loyal service to get properly compensated for systematic late payment. We are helping companies that were looking to close down, who looked insolvent and finding that cash injection they need to avoid insolvency.

Those former clients who regularly paid you late can finally be made to pay.

Ready to speak to an advisor?

For help or advice on credit management, entirely without obligation.

Call us today

0330 053 9263

The Credit Protection Association is a credit management company established in 1914. If you supply goods or services on credit then we can help you!

The Credit Protection Association – Prompting Punctual Payments – Ethical, Effective, Efficient, Economical collections

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