Terminal Losses, VAT Bad Debt Relief and Crown Set Off

Terminal Losses, VAT Bad Debt Relief and Crown Set Off

May 19, 2021 by Sandra

Often the reason for a company’s failure is either one large bad debt, or a series of problems with customers and loss of profit.

However, terminal losses and VAT bad debt relief are often overlooked when businesses face insolvency, especially if the business owner prepares their own VAT returns and isn’t fully conversant with the relevant VAT rules. 

If terminal losses and VAT bad debt relief were properly considered though, it could result in increased payments for the creditors.

So, if your client is facing financial difficulty and has asked you to explore insolvency options, or if you are a business owner who has currently run into tricky times, read on to find out more about relief from the VAT on bad debt and how to claim for terminal loss relief…

Review taxes for possible claims

When looking at insolvency options or advising your client about the right solution for them, a global review of taxes should always be considered.

If you feel there may be a possibility of a claim of any sort, it should be brought to the attention of the insolvency practitioner as soon as possible. In fact, to ensure that maximum relief is obtained, the following issues should be considered prior to any insolvency procedure:

  • Key dates for tax purposes.
  • Any corporation tax paid in the three or four years prior to insolvency. 
  • All tax allowances and reliefs.
  • The types of charges held.
  • Any assets to be sold by the insolvency practitioner (possible gains).
  • Whether there will be a transfer of business or sale of assets.
  • If the company is part of a group, and if so, the other members of that group.
  • The possibility of deferring liabilities.
  • The accounting standards adopted.
  • The centre of main interest.
  • The place of registration of the company.

Crown set off

When a company goes into liquidation, according to the Insolvency Act 1986, an account is taken of the mutual deals between the business and its creditors. As such, when a business is facing insolvency, Crown set off will always need to be considered.

If the company has a large tax liability for VAT or PAYE, all debts to and from the Crown should be added up and assessed before any work begins to reach a net balance, as the insolvency practitioner has to ensure a tangible benefit to the estate. 

Terminal loss relief 

Another sometimes overlooked loss relief is available to companies that have ceased trading and have made losses in the last 12 months.

Terminal loss relief allows for the business to carry back any trading losses that occurred in the final 12 months of trading and then set them off against any profit made in the three years up to the period when the loss was made. 

Any loss must be offset against the profits of the most recent years first before it can be carried back to earlier years, and losses must also be offset in the order they were made.

However, terminal loss relief is a complicated process, so for more information, the HMRC Company Taxation Manual is an incredibly useful resource. 

Relief from VAT on bad debts

If a business has supplied goods or services to a customer but wasn’t paid, they may be able to claim relief from VAT on any bad debts that have been incurred.

As long as the business meets all the conditions and has made supplies to customers on or after 1st April 1989, they can claim for VAT bad debt relief, whether the payment due was in money or in goods or services to be provided in a barter. 

However, they will need to wait at least six months from the later of when the payment was due and payable and/or the date of supply. They also cannot claim on a return for an accounting period earlier than the one in which they become entitled to the relief.

For more advice and information, further guidance is available from the government here. 

How McAlister & Co can help

If you are facing insolvency or if you are an accountant and your client is facing financial difficulty, McAlister & Co can provide expert help and advice on the different options available.

With over 20 years of experience, we are insolvency experts and our dedicated team is on hand to deliver bespoke advice to suit your needs. Rest assured that you will be in safe hands with us – so get in touch today to find out more about how we can help. 


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