VAT bad debt relief

Dave Shaw · Feb 2, 2010

Any ideas...?

If a factoring company say advanced £200,000, charged a total of £10,000 interest and £5,000 plus VAT in monitoring/factoring charges (both of which debited to the factoring account) but following liquidation only recovered say a total of £150,000 how would the £150,000 be applied.

Equitably it should be able to recover all of the VAT paid on the charges(taking account of any partial exemption) and have no profit and a capital loss of £50,000.

But is this how HMRC would see it?

Thanks in advance

Ian J · Feb 9, 2010

In my experience the factoring companies don't try and recover Vat if they suffer a loss on client liquidation as it would be almost impossible to analayze the account into sufficient detail as to what relates to advances and what relates to Vatable charges.

David Griffiths · Feb 9, 2010

Firstly I don't think that any part of it would be seen as a capital loss. I think that it's a trading loss as they are in the business of lending money, and simply havea bad debt.

I suspect that the position relating to VAT would depend on the factoring agreement, and how it provides for money received to be applied. If the agreement provides for receipts from customers to be applied firstly to interest and charges and then to reduction in indebtedness, then there might well be no VAT that is unpaid, and nothing relieveable.

If that's not the case, then they certainly wouldn't give full relief for the VAT. Take a situation where a customer is invoiced for £5,875 but only pays £5,000. The bad debt relief is 7/47 of £875, not the full amount. This situation is complicated by the loan element but at it's simplest the company has lost 30% of its debt so would get VAT bad debt relief on 30% of the VAT. However, I'm sure that the previous paragraph is more likely to apply.

That's my view of things, and of course there may be others

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VAT bad debt relief

Dave Shaw

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