ACCA ATX ^UK Syllabus A6. Value Added Tax - Relief available for impairment losses on trade debts - Notes ^{8 / 10}

Recoverability of VAT on impairment losses (bad debts)

Normally, output VAT is accounted for when an invoice is issued.

If the sale becomes an impairment loss, the seller has paid VAT to HMRC and has not been able to recover this from the customer. 

It is possible for the supplier to reclaim this VAT on the impairment loss from HMRC provided the following conditions are met:

1. The loss has been written off in the accounting records (the income statement)

2. 6 months has passed since the debt has been due.

If these conditions are met, then the seller can include the amount of VAT as input VAT on the next VAT return filed and therefore get relief for it.

Illustration:

Sahil Ltd. made a sale on 31/08/2024 for £120 (VAT inclusive).
 
The buyer was given a 30-day credit period. 

On 31/03/25, the debt was not paid and written off in Sahil Ltd.’s accounting records.

• Will the output VAT paid be refunded?

Solution:

• Sale  £100
  Output VAT £20
  Selling price £120

• This £20 output was paid and included in the VAT returned filed on 30/09/2024 (VAT returns are filed quarterly).

• The £120 was due on 30/09/2024, however it has not been paid by 31/03/25.

  Therefore 6 months have passed since the debt was due to be paid and it has been written off in Sahil Ltd.’s accounting records.

• Therefore, Sahil Ltd. will get relief for this output VAT of £20 by including it in the VAT return filed on 31/03/25 as input VAT.