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Here's how to claim Vat on debts you write off on the invoice basis

by , 21 August 2014
There are two methods to calculate Vat on bad debts. These are:

1. The invoice basis; and
2. The payment basis

For the purposes of this article, we'll focus on the invoice basis because it's the one that's often misunderstood by Vat vendors.

Keep reading to find out how to claim Vat on debts you write off on the invoice basis so you can do this correctly and avoid harsh penalties.

 
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Here's how to claim Vat on debts you write off on the invoice basis
 

To claim an input tax deduction for bad debts, you must physically write off the debt in your accounting records and abandon the debt completely. Of course, you can't write off a debt you're still chasing or if the debtor is still paying it off.

If you partially write a debt off as irrecoverable, having accounted for the relevant output tax, you can claim an input tax deduction on the debt you haven't recovered in the Vat period you write it off, says the Practical Vat Loose Leaf Service.

Sound confusing?

Here's an example to help you out:

You have an invoice for R11 400 in January 2012
You declare output tax: R11 400 X 14/114 = R1 400

Half the debt is paid by the debtor who disappears without paying the balance of R5 700
In January 2013, you write of the debt: R5 700 

Your input tax claim will be: R5 700 x 14/114 = R700

Just remember that when you work out the input tax on bad debts, you can only do your calculation on the original invoice amount, or part of it that the customer didn't honour. You mustn't calculate the Vat on any interest you charge on the overdue debt. The bad debt you claim as a deduction for income tax purposes excludes the Vat you claim as an input tax adjustment.

It's that simple.

Now that you know how to claim Vat on debts you write off on the invoice basis, get it right so you won't incur penalties.
 
 



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