Bad debts and your GST return

Can I claim a refund of GST for bad debt?

To claim a refund of GST, you must meet the following conditions:

you supplied goods or services for money
you accounted for and paid the GST in your return
you wrote off all or part of the sale as a bad debt in your accounts
a period of at least six months has passed since the sale
the value of the sale did not exceed its open market value
if you supplied goods, they have passed to the recipient (whether or not the recipient still has the goods)

What are the time limits for claiming a refund?

Your claim must:

be at least six months from the date of the sale
be within 12 months of the date you wrote off the bad debt

How do I claim a refund?

To claim a refund you should include the amount of the GST you are claiming in box 7 of your GST return. You should do this in the return period when you become eligible to claim (see time limits above).

Remember: if you did not charge GST on the sale, you can't claim GST bad debt relief.

Can’t I just issue a credit note?

For GST, a credit note must be the result of an agreement between the supplier and customer to change the value of a supply.

This is an example of a valid use of a credit note:

you invoice your customer for 100 duvets at £7 each plus GST
two duvets are damaged in transit
you and your customer agree to change the order to 98 duvets
you can issue a credit note for £14 plus GST and reduce your output tax (sales GST) accordingly

In this scenario, if your customer had simply refused to pay, you could not adjust your output tax by raising a credit note.

What records must I keep?

When you claim a refund you must keep:

a copy of the GST invoice you issued for the sale the refund relates to
a separate GST bad debt account showing the:
- amount you have written off as bad debt
- amount of GST you want to claim as a refund for bad debt
- GST period in which you originally accounted for the GST on the sale
- GST period in which you are claiming a refund
- total amount of GST charged on each sale
- amount of any payment received for each sale
- name of your customer
- date and number of the invoice the bad debt relates to

If you did not issue an invoice you must include enough information to show the time and type of sale.

You must keep the records listed above for six years from the date you make your claim.

How much can I claim?

The refund you can claim is based upon the amount you are owed by the customer.

If you have received no payment at all, your claim will be for the amount of GST that you charged the customer, included on your GST return, and paid to us.

If you received payment for part of the debt, you can only claim a refund of the GST on the amount that is still unpaid.

If you have made several sales to the same customer, their payments must be allocated against the oldest debt first, unless the customer requests that a payment is for a particular sale and pays for that sale in full.

Repaying input tax when you haven't paid your supplier

If, six months after you bought the goods or services on which you charged your customer GST, you have still not paid your supplier, any input tax you claimed on a GST return must be reversed on your next GST return.

You must deduct this amount from the total input tax in your GST account before you complete your next GST return.

If you settle the dispute and you pay an amount to your supplier, you may add the GST element of the amount to your input tax.

If you are part of a GST group

If two or more businesses share common ownership then they can create a GST group, enabling all transactions between firms within the group to be ignored for GST purposes, reducing administration.

Joining the GST group

If you are registered for GST as part of a group, the representative member can claim a refund of GST for bad debt on your behalf, or on behalf of any member of the group.

This means that if you have just joined a group, the representative member will be able to claim a refund of GST for bad debt on sales you made before you joined the group.

Leaving the GST group

When you leave a GST group, the representative member loses the right to claim a GST refund for bad debt on sales you made when you were a member of the group.

Only you can claim a refund for bad debt on any sales you made during the last six months that you were a member of the group.

What if I am partly exempt?

If you are partly exempt, you can adjust the values of both taxable and exempt sales you have made for debts that are over six months old at the end of your GST tax year when you carry out your annual adjustment.

If you have not paid your supplier after more than six months, you must adjust your input tax by the amount you actually claimed on your GST return.

Partial exemption from GST input tax

Examples: how to deal with bad debt

If you later receive payment or reclaim the goods sold

If, after you claim a GST refund for bad debt:

you receive a payment for the debt that you have already written off, or
you recover the goods from your customer

you must reverse the GST refund you claimed by the value of the payment received / goods recovered.

This must be done on the GST return that covers the date the payment was received or the goods were recovered.

If you and the debtor owe each other money

If you owe money to the debtor, you can set this off against any money the debtor owes you.

For example:

you have a bad debt for a sale where you charged £630 (£600 + £30 GST)
at the time you decide to write off the debt, you owe the debtor £115
the amount of the debt will be £630 less £115 = £515
to work out how much GST is included in the debt, multiply by the ‘GST fraction’ (5/105)
you can claim a refund for bad debt of £515 x (5/105) = £24.52

If you hold a security against the debt

If you hold an enforceable security against the debt, you must reduce the amount you claim as a refund by the value of that security. You must do this even if the debtor has no assets that the security can be enforced against.

If you hold a security which can’t be enforced, you can write off the full amount of the debt and base your claim for a refund on that amount.

If you have insurance against bad debts

If you have insurance against bad debts, your insurer normally won't pay the GST element of an insured debt. Therefore, insurance doesn’t affect your entitlement to a GST refund.

If the debtor’s insurers pay for the goods

If you supply goods or services to a debtor who is insured for the cost, the insurer can pay you direct.

If the insured debtor is GST registered, their insurer will usually only pay the amount excluding GST. If the debtor does not pay you the GST element, you can only claim a refund on the actual balance you wrote off.

If you assign or factor (sell) the debt

Some businesses employ 'factoring' companies to improve their cash flow. If your debts are factored (ie your company's outstanding invoices are sold to a factoring company), you can't claim a refund where an assignment of the debt is absolute (ie where there is no provision in the contract for the reassignment of the debt back to you).

Where there is provision in the contract for the reassignment of a debt, you can claim a refund once the debt is reassigned to you. You can't claim a refund while the debt is assigned to the factor.

If you receive a payment from the factor to purchase the debt, we consider this to be an exempt supply of finance. This will therefore be disregarded for the purposes of claimaing a refund for bad debt.

If your customer pays everything but the GST

If your customer refuses to pay the GST charged, or you did not charge GST when you originally made the sale and issued an invoice for the GST later, your claim for a refund will be limited to the GST part of the total debt.