If you make supplies of goods or services to a Customer but you are not paid, you may be able to claim relief from VAT on the Bad Debt you have incurred.
Similarly, you may have to repay VAT if you have received supplies of goods or services for which you have not paid, and for which your Supplier has claimed Bad Debt relief.
When it is decided that a particular debt will not be paid, the Customer is no longer called an outstanding Debtor, and becomes a Bad Debt.
You can write off the debt using the Write Off Bad Debts option in the Credit Control module. If the invoice is less than 6 months old, a credit adjustment is created and if the invoice is older than 6 months, then a credit note is automatically posted.
Example of a bad debt write off for less than 6 months old invoice:
Invoice posted for £100 Net with 20% VAT adding up to £120 gross and the double entry will be:
Nominal Account | Debit | Credit |
Sales Control | 120.00 |
|
Sales |
| 100.00 |
VAT Control |
| 20.00 |
Writing off the above invoice within 6 months results in a credit adjustment transaction being posted automatically. The double entry will be:
Nominal Account | Debit | Credit |
Sales Control |
| 120.00 |
Bank | 120.00 |
|
To reclaim the VAT separately:
Click Financials then Transactions and then click Debit VAT Journal.
On the Details section, enter your Bad Debt Nominal Account, then leave the GBP Net field as 0.0.
On the GBP VAT field, enter the VAT value, in our above example £20 as we want the VAT and Gross to be the same, and click on the Save button.
Don't worry, the transaction is not going to be posted yes, and the Save Options screen opens.
Select your Bad Debt Nominal Account as the Contra Account, then click Save.
This will have the effect of reducing the bad debt cost in your P&L Account by the amount of the VAT you are claiming and the VAT will be added to your input tax and included in Box 4 of the VAT Return.
When you receive the reclaimed VAT, your £20.00 will be credited to the VAT Control Account and debited to the Bank Account leaving your Bad Debts at the net value of your invoice which in our example was £100.00.
For more information on how to process your bad debt, please refer to our Process Bad Debt article.