Study tips: adjusting for bad debt relief and fuel scale charges on a VAT return

I’ve just spent the last few hours trawling through a set of accounts and preparing a VAT return.

It could be said that a VAT return is just a form with nine boxes that need filling in, however, as with all HMRC returns, they must be completed in the way stated, to comply with HMRC’s requirements.

HMRC now has a wealth of VAT related information online to help people get it right, from e-learning courses to official VAT return guidance. If you are new to completing VAT returns or come across something you don’t regularly deal with, looking up the relevant guidance would be the first step to ensuring compliance.

AAT has abundant resources for those who are studying indirect tax. This reflects the fact that the VAT system is complicated and wide ranging, with rules and exceptions that must be followed. If you were unsure about anything whilst at work, you would look it up and follow the rules, therefore you are allowed, and expected, to do the same whilst studying.

A simple example of this is the need to include pence in figures for boxes 1 to 5, but to include whole pounds only for boxes 6 to 9.  If you try to include pence in an online return for these last four boxes it will be disallowed and the consequences for doing it whilst studying are significant.

In this example, when completing my client’s return, I need to make a couple of adjustments to account for an irrecoverable debt that had been written off and to reflect the personal use of a vehicle, before I even get to the boxes.

Let’s look at the bad debt relief

VAT that has been paid to HMRC and which has not been received from the customer can be reclaimed as bad debt relief. In order for this to be the case, the sale must have been made on a credit basis. This is because the income from credit sales is received in an agreed period of time after the sale, so there is potential for the VAT to be paid to HMRC in one quarter and then the debt to become irrecoverable in a later quarter.

The business must also not be on the cash accounting scheme. This is because under cash accounting, VAT on sales is only due to HMRC once it has been received from the customer so even if the debt became irrecoverable, the fact that the VAT wasn’t paid to HMRC means it will never be in need of bad debt relief.

We also need to understand that an irrecoverable debt is an expense. It is a sale that a business has made, ie. the goods or services have been delivered, but has never been paid for.  Therefore the value of those goods or services effectively becomes a cost to the business. There are a few other conditions that need to be met to make an irrecoverable debt valid for bad debt relief, but as long as they are fulfilled, knowing that we are dealing with an expense tells us that we need to account for the adjustment in box 4. As our expenses have increased it is logical that the value of the VAT to be reclaimed is added to the amount of VAT being reclaimed on purchases.

Now let’s consider the fuel scale charge

HMRC allows VAT on road fuel to be reclaimed in four different ways. The method that allows all of the VAT to be reclaimed regardless of whether it is used for business or personal purposes, requires an appropriate fuel scale charge to be paid. This is because fuel can be used for business and non-business mileage but only the business element is reclaimable.

The confusing thing about the fuel scale charge is that it’s a compensating payment that businesses make to HMRC to account for VAT they’ve reclaimed on fuel used for private mileage, as that isn’t strictly allowable. HMRC are giving with one hand – allowing all the VAT on fuel to be reclaimed in box 4, and then taking with the other – adding the fuel scale charge in box 1 for the private usage element. The net result is that only the VAT on fuel used for business purposes is actually reclaimed.

The fuel scale charge is accounted for in box 1. Box 1 is for output tax – in other words VAT due in the period on sales and other outputs. You might not immediately think that the fuel scale charge belongs here but the value of box 1 is owed to HMRC so as the fuel scale charge increases the amount owed to HMRC, therefore adding it here is understandable.

So, what did all this mean for my client? Well their unadjusted figures, which include £64.42 for all the VAT on petrol, were:

Bad debt relief was reclaimable on a net sale of £1800, so £360 needed to be added to box 4.

Also a fuel scale charge of £20.50 needs to be added to box 1. As £64.42 was included for all VAT on petrol in box 4, this results in only the business element of £43.92 actually being reclaimed.

The final figures were:

Browse the full range of AAT study support resources here

Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.

Related articles