VAT relief – What is VAT relief?

VAT relief might refer to either a reduced rate of VAT or a refund for VAT paid on bad debt.

VAT isn't the only tax you need to manage when you're self-employed. Find out about the other taxes you'll pay as a freelancer or entrepenuer.

In the UK, VAT is usually charged on goods and services at a rate of 20% (although certain products qualify for reduced rates). VAT-registered organisations then report the VAT they have charged on sales and paid on expenses via their annual or quarterly VAT Return.

However, some individuals and organisations qualify for reduced VAT rates, while some businesses may also use their VAT Return to reclaim VAT that they have already paid to HMRC but cannot collect from a customer.

VAT relief for charities

Although charities must pay VAT on the goods and services they buy from VAT-registered business, most charities are eligible for VAT relief, which entitles them to pay a reduced VAT rate of 5 or 0 percent on some goods and services. HMRC has a full list of the goods and services that qualify for charity VAT relief.

To claim VAT relief, a charity needs to show their supplier evidence that they are a charity, which can be either a Charity Commission registration number or a letter of recognition from HMRC.

VAT relief vs. VAT exemption

VAT relief is not the same as VAT exemption, which is when an organisation makes no taxable sales and therefore cannot register for VAT. Organisations that do not make taxable sales might only sell VAT-exempt goods or services, or they simply might not be involved with any ‘business activities’.

This means that both charities and for-profit businesses can be eligible for VAT exemption. However, while charities can qualify for VAT relief regardless of whether or not they are VAT-exempt, businesses do not qualify for VAT relief even if they are exempt from VAT.

VAT relief for disabled people

In the UK, people with a disability or long-term illness receive VAT relief, which means that they do not pay VAT on:

Products that are designed or adapted to help with the disability or illness
The installation, repair, or maintenance of these products
Spare parts and accessories

In order to claim VAT relief, your disability or long-term illness needs to qualify. HMRC explains which conditions you need to meet in order to be considered as having a disability or long-term illness for VAT purposes.

If you qualify for VAT relief as someone with a disability or long-term illness, you will need to provide your supplier with written confirmation before you can receive VAT relief.

VAT relief for bad debt

Bad debt is money that a business is owed by a customer but cannot be collected. Bad debt can occur if a customer goes bankrupt or if it is cheaper to simply write off the debt rather than continue making attempts to collect the money owed.

If you are registered for VAT and then incur bad debt, it is possible that you will have already reported and paid VAT that you cannot actually collect. In these circumstances, you might be able to reclaim the VAT you’ve paid to HMRC.

How to claim VAT relief for bad debt

In order to claim VAT relief for bad debt, you first need to make sure that you qualify. To qualify for bad debt VAT relief, you need to meet the following criteria:

You have not sold the debt on to another party
You have not charged the customer more than the normal price of the good or service
The debt is older than six months but no older than four years and six months

If you do qualify for VAT relief for bad debt, you can claim bad debt VAT relief through your VAT Return. You should include the amount of relief you want to claim in your Box 4 total.

If the customer does eventually pay, you no longer have bad debt. You should therefore pay the bad debt VAT relief back to HMRC. This can also be done through your VAT Return, and you should include the amount of relief you received in your Box 1 total.

Record keeping for bad debt VAT relief

If you want to claim VAT relief for bad debt, you need to keep a VAT bad debt account. In this account, you should document every bad debt older than six months, making sure that you record each of the following details:

The total amount of VAT
The amount written off and any payment you have received
The amount of VAT you’re claiming on the debt
The VAT period in which you paid the VAT and are claiming the VAT relief
Invoice details (such as the invoice number, date, and customer name)

The information you record in your VAT bad debt account needs to be kept for at least four years. You will need to provide this information to HMRC if you are asked to document your bad debt or VAT relief claims.