Tag Archives: non-payment

VAT refunds if your customer won’t pay

Many business owners tell us that far too much of their time is spent chase up customers on their invoices. When you’ve provided goods or services, you’re entitled to receive your money by the due date. But if they refuse to pay you for your work, or if your client goes bust, how do you account for VAT charged?

First, make sure you’re on the right VAT system for your business

 Cash Accounting Scheme

Does your company turn over less than £1.35million each year? Do you send over 30, 60, or 90-day invoices? If so, you should be on the cash accounting scheme.

If your business allows deferred payment when a customer places an order, you are always at risk of that customer not paying. This will have a damaging effect on your company’s cashflow because the money you’re spending is not being replaced by customers paying you.

With the standard VAT system (the so-called “accrual” scheme), you’ll have to include (and pay) the VAT you’ve charged on your invoices when you submit your VAT filing to HMRC. If your customer does not or cannot pay, you will have to wait months to receive a credit against the VAT you’ve paid on your bill because of the current rules regarding refunds.

The cash accounting system, unlike the standard VAT system, means you only have to pay VAT on invoices which have actually been paid. You don’t even need to ask HMRC to switch to this scheme – just talk to Kelsall Steele.


Flat VAT Schemes

HMRC launched the flat VAT scheme to make working VAT out simpler for the companies they collect from. The flat rate pulls in near exactly the same amount as the standard VAT scheme for HMRC but using it means working out your bill is a lot less time-consuming.

Under this scheme, you’re not able to claim back the VAT on goods and services your business buys (input VAT). Instead, you pay a pre-determined percentage of your turnover and VAT every quarter.

Say you invoice a customer for £1,000 + VAT, so £1,200 in total. You would keep 13% (£156 if that was your flat rate) of the invoice for your quarterly VAT bill.

On the flat rate VAT scheme, had this customer not paid you, you subtract the flat rate VAT element (£156) from VAT charged (£200) to work out your special allowance under the flat rate scheme, in this case £44. You then include it in your VAT account on the next return.


When can I make a claim?

To claim back against bad debt, certain criteria must be met.

If the invoice is more than 6 months’ overdue for payment, it has been officially written off in your accounts, and the output VAT on the invoice has been declared and paid to HMRC on a VAT return, you can make a claim.

Records to keep – even after your claim

Once you’ve submitted your bad debt claim, you still need to keep your evidence organized. HMRC may enquire about your request up to four years after you make your claim. Make sure you file:

  • A copy of the VAT invoice you’re claiming relief on
  • How much you are writing off as bad debt
  • The VAT on which you have made the claim
  • The total amount of VAT you charged on the sale
  • The customer’s name
  • The invoice number
  • The invoice date
  • Any part-payment received, shown separately on each invoice
  • The VAT period you claimed relief in
  • The VAT period in which you originally paid the VAT

What happens if your customer eventually pays?

If you’ve already received your VAT refund and then your customer finally pays you what they owe, you’ll need to let HMRC know.

Just put the total you’re repaying in Box 1 of you VAT return. If your customer pays you the full amount, you pay back the VAT to HMRC in full. For a part payment, you would need to pay the VAT back on the part payment.

Talk to your accountant

If you want to speak to us about all aspects of credit control and VAT, call us at any time on 01872 271655 or email enquiries@kelsallsteele.co.uk.