The Main Menu for the Brooks Green Website
Chartered Accountants | Business Development Specialists | Registered Auditors.
Abbey House, 342 Regents Park Road, Finchley, Barnet, London, N3 2LJ
(Also offices in Milton Keynes, Buckinghamshire)
Growing your business is our business
Selling on credit in the current economic climate may carry increased risk. Even where credit control procedures are strong there will inevitably be bad debts. As a supplier you must normally account for output VAT when the sale is initially made, even if the debt is never paid, so you risk being doubly out of pocket.
VAT regulations do not permit the issue of a credit note to cancel output tax simply because the customer will not pay! Instead, where a customer does not pay, a claim to recover the VAT on the sale as bad debt relief can be made six months after the due date for payment of the invoice. For example, if a trader supplies and invoices goods on 19 October 2008 for payment by 18th November 2008 (i.e. a normal 30 day credit period), then the earliest opportunity for relief if the debt is not settled would be 18th May 2009. The relief would be included in the return into which this date fell, depending on the business' return cycle.
The taxpayer can claim relief for the output tax originally charged and paid over to HMRC, no matter whether the rate of VAT has subsequently changed. In the above example the standard VAT rate charged would have been 17.5% (not the current 15%) so a claim can be made for the full 17.5%. The claim is entered as additional input VAT - treating the uncollected VAT as an additional business expense - rather than by reducing output VAT on sales.
A customer is automatically required to repay any input VAT he has claimed on a debt remaining unpaid six months after the date of the supply (or the date on which payment is due if later). Mistakes in this area are so common that visiting HMRC officers have developed a programme enabling them to review Sage accounting packages and to list purchase ledger balances over 6 months old for disallowance.
If you are a small business you may be able to register under the cash accounting scheme, which means you will only have to account for VAT when payment is actually received. This can give your business a considerable cash flow advantage if your customers normally take a long time to pay, and will also give you automatic bad debt relief.
Where your business is registered under cash accounting, do remember that this also means that VAT cannot be claimed on purchases and other inputs until you have actually made the payment, rather than the normal method of accounting for the reclaim when you receive the invoice.
What is best for you will depend on the type of business you operate. Businesses which benefit most from the scheme are those which have relatively low taxable inputs, for example service companies. Retailers selling for cash do not generally benefit from the scheme, since they receive the cash for their sales at point of sale and often pay for goods on credit, so the normal method of reclaiming purchase VAT based on invoice not payment is VAT efficient already.
The same thing also applies to businesses whose sales are mostly zero-rated; there is no point in deferring the receipt of your repayment for inputs.
Please contact us if you would like any more information or assistance with these VAT aspects.
Autumn 2011 headlines
We provide four Quarterly News Journals packed with useful breaking news, all intended to keep you up to date with the latest information. We display one years worth of news, just in case you have missed something.
We provide four Quarterly News Journals annually, packed with useful breaking news, all intended to keep you up to date with the latest information. We display one years worth of news, just in case you have missed something.
We offer of all four of our quarterly news editions (AND the Budget Edition) in printed form to all our clients free of charge. Call us on 0800 146134 or contact us to subscribe.