Publish Date

May 27, 2020

COVID-19: Impact of the COVID-19 VAT deferral on Bad Debt Relief (BDR) claim

A&M Tax Advisor Update

What is Bad Debt Relief for VAT? – If you have made supplies to your customers and have not been paid, six months after the due date you can normally claim relief from the VAT on bad debts for the goods and/or services that you have supplied provided all the conditions of a BDR claim have been met.

VAT deferral due to COVID-19 – In order to mitigate the impact of the pandemic situation, the UK Government has given companies the option to defer the VAT payments due between 20 March 2020 and 30 June 2020 until 31 March 2021, with no interest or penalties applying.

How the VAT deferral scheme impact the Bad Debt Relief? –  A first condition of a valid BDR claim is that you must already have accounted for VAT on the supplies and paid it to HMRC. Therefore, if you have opted to defer your VAT return payment, you will not have met the first condition to make a valid BDR claim as the output tax would not have been paid to HMRC potentially until 31 March 2021.

  • For example: You have submitted your quarterly March 2020 VAT return and opted to defer the VAT payment to 31 March 2021. One of your sales invoices issued on 1 March 2020 with a 30 days payment terms remains unpaid by your customer. Once 6 months have passed (i.e. 1 October 2020) you wonder if you can benefit from Bad Debt Relief and claim back the output VAT related to that invoice in the December 2020 VAT return.
  • Answer: You cannot claim for Bad Debt Relief for that invoice issued on 1 March 2020 in the December 2020 VAT return. As the output tax due to HMRC will not be paid until 31 March 2021, it does not meet all the relevant conditions for a BDR claim. Once the output tax is paid to HMRC you can claim BDR.

Next steps? – Review and amend your standard practice to BDR claim to factor the VAT payment deferral. This will be key where you have an automated system in place whereby your ERP generates a bad debt report.