VAT payments and writing off invoices

ConfusedTech

I am managing a company at the moment that has amassed numerous clients that will not pay their bills for one reason or another. We know some of these will not be paid and cant afford to chase them legally as their values are too low. The issue that I need to resolve is that we have already accounted for the VAT on these payments, ie we have paid the VAT. It is critical that we get this VAT back if we write off the debt. I have been told that if I write off an invoice, or a client as a bad debt, that I cannot claim the VAT back, as the revenue do not recognise this as a good enough reason. IE, 'Its your problem not ours'. Can anybody enlighten me on this, as our accounts are 100% accurate and I dont want to generate a problem with the revenue.

jakestevens81

As far as I am aware you can write Vat off on bad debts but a way to get over this problem is to issue Credit notes for the invoices outstanding that you consider that you wont get paid for. And you can claim the Vat back this way.


Reason for credit note could be, "dispute with client"



[Deleted]

ConfusedTech

Jake, Thats exactly what we have done in the past and we would prefer not to do it any more, as I expect to be audited some time soon. I would also like to keep the books straight for personal reasons.
I would really like to know the answer to that query though, as it is a stumbling block that may not exist! I will give you a ring though if I need the alternative

Mr. Incognito

VAT Guide 2008 available on te Revenue website

9.15 Returned goods, discounts, bad debts etc.
Where, after a supply, there is an adjustment in the consideration, e.g. because goods have been
returned, or discounts or other price adjustments have been allowed, the VAT is correspondingly
adjusted. This adjustment is also allowed, subject to the agreement of the appropriate local Revenue
District, where bad debts have been written off after VAT has been accounted for on the supply. This
adjustment is not allowed in respect of property transactions.
Where any price reduction has been allowed by one VAT-registered person to another after the issue
of an invoice showing VAT, and a corresponding VAT adjustment is actually made, the person who has
issued the invoice is required to issue a credit note showing the amount of VAT by which the liability
has been reduced.The reason for this requirement is that, in a transaction between registered persons,
the VAT charged by the seller may normally be offset by the purchaser against his or her own liability.
In practice it is unnecessary to issue credit notes for VAT and to adjust VAT liability because of discounts
or other price allowances if both parties are registered for VAT and the discounts or price allowances
are applied only to the price of the goods and not to the VAT element. If this is done, the seller’s VAT liability
and the purchaser’s VAT credit are unaltered. Such a procedure is permissible provided both parties
agree. However, even with both parties’ agreement, it is not permissible if the seller is a person
authorised to account for VAT by reference to the cash receipts basis (see Chapter 12). See also paragraph
3.9 for information regarding cancelled deposits.

Your source is full of it. Of course you can write of VAT for bad debts. You just take a credit for it on your next VAT return.

ConfusedTech

Mr Incognito, Fair play and spot on. This was my understanding originally, but it does bring me to the next question. What are the chances of revenue saying no to this refund? as it still needs to go through a process.
'This adjustment is also allowed, subject to the agreement of the appropriate local Revenue District, where bad debts have been written off'
This is my fear, and I suppose the fear of he who advised me!!! Also does anybody know how long this agreement takes?
Thanks in advance.

Mr. Incognito

I'm not a VAT specalist so I don't know how long. I'm under the impression that you just claim it as an input credit in your next return. The Revenue discretion is to do with whether you can prove it's a genuine bad debt not that they have a discretion to refuse the input credit if it is shown to be genuine.

You could always just ring the VAT district and ask them, they're usually quite helpful.

ConfusedTech

Fear blocks me from doing that, but I suppose I have to. I know them on a first name basis :0 Thanks again...

Jpers

The issue for Revenue with bad debts tends to be the fact that when you issue an invoice to a customer, you pay over the VAT to Revenue and the customer claims the input VAT on their return.

When you write off a bad debt, you reclaim the sales VAT that you paid over, but in most cases, the customer isnt going to repay the input VAT that they claimed on your invoice, whether they have paid it or not.

Therefore Revenue take a double hit - the customer has used the invoice for input VAT and Revenue have repaid your money on the 'bad debt' invoice at the same time.

swanvill

Hi ConfusedTech,

I would agree with the above posts about going the credit note route.

For the future I would suggest you issue proforma invoices, which are used a lot by accountants/ solicitiors.

Proforma invoices have the word ''Proforma' before the word invoice and have a sentence that states' This is not a VAT invoice but a VAT invoice will be issued upon payment of the proforma invoice.

What this means is that you are able to bill your customers (& they're are liable to pay you for the work done) but you do not have to pay the VAT until you create a VAT invoice, which you only do once you have received payment for the profoma invoice. This will help your cash-flow.

I know that this creates extra admin work but so does creating credit notes, but on the positive side it will reduce your VAT liability and prevents you having to pay Corp Tax on sales that you have not yet received the money for.

I hope you find this useful.

ConfusedTech

Swanvill/Jprs, Two great points, and some very useful information. The details you provided makes the situation 100% clear now, especially the fact that if my client has claimed the VAT, which I would think that they havent. 'Proforma' invoices now make total sense to me, so I have learned more than I had hoped. Believe me that my approach to invoicing has already changed and will be altered a little more with this info. Thanks.

EI-EAY

Dont be so worried about a VAT audit i've been through them a few times with clients and its no big deal as long as your not deliberately messing them about you shouldnt have a problem.

kluivert

Confused,

Quick answer Confused, is to raise a credit note for the bad debt.

That means you reduce your vat liability on your next return.

Contray to what was said above, your client will increase their vat liability because of the credit note, therefore the Revenue do not take a double hit.

Make sure that you reduce your bad debts list by the value of the credit note.

The only issue the Revenue have regarding bad debts is this.

When preparing your corporation tax every year the revenue will not accept movement in GENERAL Bad Debts, only movement in SPECFIC Bad Debts.

This means if you say that your bad debts are about 1k in year 1 and say 2k in year 2, this is an increase in a GENERAL Bad debt provision which is not allowable in your tax computation.

If you have a vat audit then I would advise that you find out for what period it is for - say last year.

Photocopy of Sales Invoices and Credit Notes.
Photocopy all Purchase Invoices and Credit Notes.
Do out a report of all sales transactions and purchase transactions if you have a computerised accounts system, or photocopies of your purchase and sales day books for the period.
Photocopy all your vat working for each period.
Photocopy all copies of your Vat Returns.

Ensure your vat return agreed to your workings, ensure your workings agreed to transaction history report or daybooks, ensure transactions history reports or daybooks agreed to actual sales and purchases invoices.

Put it all into a A4 binder or two depending on the amount of photocopying. Reference the files 1, 2, 3 etc.

Give the whole lot the Revenue Auditor, they will take all away and work on it.

If they have an queries they will contact you directly.

When they are finished they arrange a meeting and go through any areas that needs to be addressed.

If there is any penalties, negiotate with them, yes you can do this, depending on how well your books and records are kept, if you can show you can do better.

If there are any areas whereby shouldnt have re-claimed vat, then this adjustment is made on your next vat return.

If you feel this is too much, then employ the services on your accountant to conduct the audit on your behalf.