How should a VAT vendor adjust for a customer debt that is written off?

Direct answer

An invoice-basis VAT vendor may make a VAT adjustment where a customer debt has actually become irrecoverable, the original supply was taxable for consideration in money, and the vendor already accounted for output VAT on that supply. The adjustment uses the tax fraction that applied when the original supply was made and applies to the amount actually written off.

If the vendor later receives payment on a debt already written off, it must account for output VAT on the recovered payment in the tax period it receives it.

What this means in practice

The word “written off” is important. An accounting provision for doubtful debts is not the same as an actual irrecoverable write-off. Before adjusting VAT, the business should have recorded the write-off in its accounting system and be able to explain why the amount is no longer expected to be recovered.

The rule is targeted at invoice-basis vendors. Those vendors may have already accounted for output VAT before receiving the customer's money. The bad-debt adjustment can address that position if the statutory conditions are met. It is not a general refund for every overdue invoice.

The original VAT treatment matters. SARS's VAT guidance says the adjustment is calculated using the tax fraction applicable when the supply was made. Do not automatically apply the VAT rate shown on the current VAT201 or use a current tax fraction for an older supply without checking the original tax period.

Step-by-step

1. Check the original supply.

Confirm that it was a taxable supply for consideration in money. Locate the original tax invoice, customer ledger, agreement, and VAT201 showing that output VAT was previously accounted for.

1. Confirm the accounting basis.

Check that the business accounted for the relevant supply on invoice basis. The payments basis has separate restrictions and may not support the same adjustment.

1. Establish that the debt is actually irrecoverable.

Record the precise amount written off in the accounting records. Retain the management approval, collection history, and debt-collector or attorney records that support the conclusion.

1. Calculate the VAT adjustment.

Apply the tax fraction that applied at the time of the original supply to the amount actually written off. Keep the calculation with the original invoice and VAT records.

1. Record the adjustment in the appropriate VAT period.

Reconcile the adjustment to the VAT201, the general ledger, and the aged-debtors report. Do not claim the adjustment twice or use it for an amount merely provided for as doubtful.

1. Monitor later recoveries.

If any amount is subsequently recovered, account for output VAT on that payment in the tax period received. Keep recovery records linked to the original write-off.

Documents and records to keep

• Original tax invoice, agreement, customer ledger, and VAT201 showing output VAT.
• Aged-debtors report and accounting entries recording the actual write-off.
• Management or board approval for the write-off where applicable.
• Collection correspondence, debt-collector, or attorney records.
• VAT adjustment calculation using the original tax fraction.
• Records of later payments or recoveries.

Important limits and exceptions

The adjustment is not available merely because a debt is late. It requires an actual irrecoverable write-off and the stated invoice-basis, taxable-supply, and prior-output-VAT conditions.

SARS's VAT404 guidance lists restrictions that can apply to repossessions under an instalment credit agreement, payments-basis treatment, wholly-owned group-company debts, and non-recourse transfers of receivables. These are not minor details. A business with any of these facts should obtain tailored advice before claiming.

The article does not calculate a current VAT rate. The applicable tax fraction is tied to the original supply. That is why the invoice date and original VAT treatment must be preserved.

When to get tailored advice

Get advice where a debt is large, the customer is connected to the business, the debt was sold or transferred, goods were repossessed, or the business uses the payments basis. Also get help if a write-off relates to several historic VAT periods or if the debt is later partially recovered.

TaxProof can help organise the invoice file, write-off approval, collection records, and VAT reconciliation for review. It cannot determine irrecoverability or the correct adjustment without the transaction facts.

Related TaxProof guides

• VAT registration and VAT201 compliance
• SARS verification, audit and tax debt response
• Related upcoming guide: VAT payments basis, B01-BUS-001

Sources

• SARS VAT 404 Guide for Vendors
• SARS VAT Connect Issue 19