VAT on Bad Debts

Jenny Chamberlain
Jenny Chamberlain Registered Posts: 10 Regular contributor ⭐ ? ⭐
I am working for a company that takes deposits equivalent to one months rent in case of a bad debt. If however a tenant does not pay the rent and we use this deposit for this bad debt what happens to the VAT.

We would have already raised an invoice to them that includes the VAT, but the deposit we hold is net of the VAT.

1) How do we account for the VAT that will no longer be paid
2) Do we lose out to the VAT man
3) Should we really be taking deposits that include any VAT that may be due

I have always worked in a corporate environment until now so have never come across this before. Any help gratefully appreciated.


  • Monsoon
    Monsoon FMAAT, AAT Licensed Accountant Posts: 4,071 ? ? ?
    Let me get this straight:
    Rent £100 + VAT = £115
    Deposit held £100 only.
    Tenant defaults, so you keep the £100 as 1 months rent but are short by £15?

    You ought to be taking £115 as a deposit and only declaring the VAT on it if the deposit is used for a taxable supply (i.e. rent, as taking a returnable deposit isn't a taxable supply).

    As to the correct treatment of the missing £15, I am not sure. You would lose out and I guess the standard bad debt relief of 6 months, of the VAT fraction of £15 would apply after 6 months (i.e. after then you can take £100 as gross, whereas before bad debt relief applies you'd have to take £115 as the gross and suffer the cost).

    I think. VAT is not my strong point! :laugh:
  • deanshepherd
    deanshepherd Registered Posts: 1,809
    Faerie has summed it up pretty well.

    The value of a deposits should generally always be held plus VAT so your company would be well advised to change their policy.

    You may also wish to take legal advice before setting a deposit against rent until you are perfectly happy that no damage has been done to the property and you are happy to accept the deposit held as full and final settlement.

    I had a friend who took a non-paying tenant to court and he almost had his case thrown out because the deposit had already been set against rent owed before the tenant was evicted and the final liability had been established by the court.

    Commercial tenancies are probably less problematic but still worth getting that advice.
  • Jenny Chamberlain
    Jenny Chamberlain Registered Posts: 10 Regular contributor ⭐ ? ⭐
    Thank you for that it ws really helpful, I have just been reading about bad bedt relief on HMRC website. Are you able to expand on this any further for me as to the correct accounting treatment please.
  • Hasan.Ahmet
    Hasan.Ahmet Registered Posts: 87 ? ? ?
    Vat on Bad Debts

    The sales ledger account is cleared. Nowadays this is automated within the accounting packages. ie go to write off . The entries then becom
    Bad Debt Dr (including vat)
    Sales Ledger Control Cr (including vat)

    Once all conditions are met to claim the relief
    Vat Output Dr
    Bad Debt Cr (with the amount of vat)

    I've seen arguments that the figure shouldn't be debited to the output (Rather claim in box 4) but haven't seen any authority sited.
  • Jenny Chamberlain
    Jenny Chamberlain Registered Posts: 10 Regular contributor ⭐ ? ⭐
    thank you.
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