Harbour Lane Cycles: completing the boxes, blocked input tax and a bad debt
Harbour Lane Cycles Ltd is VAT registered and prepares quarterly returns to 30 September, using the standard (invoice) accounting basis. All figures below are net of VAT unless stated.
Sales for the quarter: standard-rated £84,000; zero-rated children's cycles and helmets £26,000; reduced-rate child car seats £4,000; rent from a small office let to an unconnected tenant £2,000 (the company has not opted to tax).
Purchases for the quarter: standard-rated stock and overheads £30,000; new workshop equipment £12,000; business entertainment of UK customers £800; zero-rated stock (child car seats bought in) £5,000; a car for the sales director £18,000 including VAT, used about 60% for business.
Separately, a customer invoiced £4,800 including VAT on 12 March 2024 (due 12 April 2024) has gone into liquidation and nothing has been received. A sales invoice for £2,400 including VAT dated 5 June 2024 was left out of the June return.
1. Calculate boxes 1, 4, 5, 6 and 7 of the return for the quarter ended 30 September 2024, before any bad debt or error adjustment.
Read the worked answer
Box 1 - VAT due on sales
- Standard-rated £84,000 × 20% = £16,800
- Zero-rated £26,000 × 0% = £0
- Reduced-rate £4,000 × 5% = £200
- Exempt rent = £0 (outside the scope of VAT)
- Box 1 = £17,000
Box 4 - VAT reclaimed on purchases
- Stock and overheads £30,000 × 20% = £6,000
- Workshop equipment £12,000 × 20% = £2,400
- Business entertainment of UK customers - input tax blocked, so £0
- Zero-rated stock - no VAT to reclaim, £0
- Car - input tax blocked because the car is available for private use, so £0 (the 60/40 split is irrelevant; you cannot apportion a car's VAT unless it is used exclusively for business)
- Box 4 = £8,400
Box 5 = £17,000 − £8,400 = £8,600 payable to HMRC
Box 6 - total sales excluding VAT = 84,000 + 26,000 + 4,000 + 2,000 = £116,000. Exempt and zero-rated sales go in box 6; there are no acquisitions or dispatches, so boxes 8 and 9 are nil.
Box 7 - total purchases excluding VAT = 30,000 + 12,000 + 800 + 5,000 + 15,000 (car net) = £62,800. Box 7 records the value of all inputs even where the VAT itself is blocked; only box 4 is restricted.
2. Can the company claim bad debt relief on the £4,800 invoice in the September return? If not, when and how much?
Read the worked answer
No - the September return is too early.
Bad debt relief requires six months to have passed from the later of:
- the date the payment was due, and
- the date of supply.
Here the invoice was dated 12 March 2024 and was due on 12 April 2024, so the six months run from 12 April 2024 and expire on 12 October 2024 - after the quarter end of 30 September 2024.
Relief is therefore claimed in the return for the quarter ended 31 December 2024.
The amount is the VAT originally accounted for: £4,800 × 1/6 = £800, entered in box 1 as a negative figure (or deducted from output tax). Box 6 is also reduced by the £4,000 net value.
Conditions the company must be able to show:
- the VAT was accounted for and paid to HMRC in an earlier return;
- the debt has been written off in the accounting records (a credit note is not required);
- the customer is not connected to the company.
If the customer later pays part of the debt, the recovered relief must be repaid by adding the VAT back to box 1 of the return covering the payment.
3. How should the omitted June invoice of £2,400 including VAT be dealt with? Show the revised box 1, box 5 and box 6 figures (ignoring bad debt relief).
Read the worked answer
The VAT understated is £2,400 × 1/6 = £400. This is a net error of £400, which is below the £10,000 limit, so it does not need to be notified separately on form VAT652 - it is corrected on the next return.
Adjustments to the September return:
- Box 1: £17,000 + £400 = £17,400
- Box 6: £116,000 + £2,000 = £118,000
- Box 4: unchanged at £8,400
- Box 5: £17,400 − £8,400 = £9,000 payable
Points that catch people out:
- The error limit applies to the net VAT, not the gross or net invoice value. If the net error had been £10,000 or more (and not below 1% of turnover, capped at £50,000), it would have to be disclosed separately using form VAT652, not netted off on the return.
- A deliberate error can never be corrected on the return.
- The net value also has to be added to box 6 - correcting box 1 alone would leave the return internally inconsistent.