A bad debt: how to reclaim the VAT

When is an invoice uncollectible?

There are two moments at which you become entitled to a refund. The first is as soon as it's established that your client won't pay, for example in a bankruptcy or a debt restructuring in which your claim goes unpaid. The second is a fixed period: if your invoice is still unpaid one year after its due date, it's deemed uncollectible for VAT purposes. So you don't have to engage a bailiff or start court proceedings first to get the VAT back.

How do you reclaim the VAT?

You don't need a separate request: you process the refund in your regular VAT return for the period in which the entitlement arises. This applies only under the invoice system; under the cash system you remit VAT only once you are paid, so there is nothing to reclaim. In it you reduce the VAT you owe by the amount you had paid on the uncollectible invoice. Make sure you split the net amount and the VAT amount correctly, and keep the supporting evidence: the outstanding invoice, your reminders and any correspondence or proof of bankruptcy. In an audit the tax authorities want to see why you considered the claim uncollectible.

If you've missed the moment and didn't include the correction in the right return, that can usually still be put right through a supplementary return. Don't wait too long, because time limits apply.

And if the client pays after all?

Then you reverse it. If you do receive the amount later, in whole or in part, you pay the VAT on the portion received again in the return for that period. That isn't a penalty, simply the mirror image of the refund. So keep invoices written off as uncollectible separately in your records, so a late payment doesn't quietly sit in your account as extra profit without VAT.

What does it mean for your profit?

Besides VAT there's income tax. You included the turnover in your profit at the time, even though the money never arrived. If the receivable proves uncollectible, you write it off as a cost, which lowers your profit and therefore your tax. Do that in the year it became clear payment wouldn't come, not years later; the write-off belongs in the year the loss arose.

What's sensible to do?

Go through your outstanding invoices at least quarterly and flag anything more than a year past its due date; that's exactly the list you can reclaim VAT on. Keep sending reminders until then, because a VAT refund is no reason to give up on the claim. If you come across a case where you're unsure whether it's already uncollectible, run it past us at the next return.

The one-year deadline and how to use it

For VAT, a claim counts as irrecoverable in any case one year after the final payment date passed. You need not wait for a bankruptcy or collection process: after that year you reclaim the remitted VAT in your regular return.

Frequently asked questions