Bad Debts, Good News: How to Claim Back VAT the Right Way
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When customers don’t pay, it’s more than just a cash flow headache — you’ve already paid VAT to SARS on money you may never see. The good news? The VAT Act offers relief through adjustments for bad debts. In this article, we break down the practical steps accountants need to follow to help their clients claim back VAT on sales that turn sour.
🔍When Does a Debt Become Irrecoverable?
A debt becomes irrecoverable when it is clear that the customer will not pay, despite reasonable (and documented) efforts to collect. Only at this point can VAT be claimed back under Section 22(1) of the VAT Act.
⚠️ You may consider the debt irrecoverable in the following common scenarios:
Customer is liquidated, insolvent or under business rescue.
The client cannot be reached and has stopped trading or vanished.
The account is overdue (e.g. 120+ days) with no response to follow-ups.
Legal advice confirms poor recovery prospects, or the cost outweighs the benefit.
Debt has been prescribed under the 3-year rule in the Prescription Act.
🧠 Writing off a debt is not simply about timing — it’s about making a well-documented decision based on facts and business reality. SARS expects you to apply sound commercial judgment and keep all relevant records for at least five years.
📂 Documentation and Evidence
Before claiming VAT on a bad debt, make sure to retain:
Original tax invoice – valid and VAT-compliant.
Proof of collection efforts – emails, calls, final demand letters.
Aged debtors report – showing how long the account has been overdue.
Write-off entry – journal entries or management approval confirming the amount is written off.
Legal or insolvency documents – where applicable (e.g. liquidation notices, court orders).
Claiming VAT Back
You may adjust your VAT declaration to reflect the losses when the amount becomes uncollectable, when certain conditions are met.
📌Note: VAT adjustment is only allowed if:
A valid tax invoice was issued
The full or partial debt is written off in your accounting records, and
The original transaction was included in your VAT calculation as taxable supplies.
Avoid These Common Mistakes
Only write off a debt when it’s clearly irrecoverable, not just late. Premature claims will create unnecessary admin complications and can lead to SARS audits.
Without supporting documents, SARS can disallow the deduction.
Always apply the rate that was in force when the original invoice was issued.
What If You Recover the Money Later?
Under Section 22(2) of the VAT Act, if the customer pays after the VAT was claimed as a bad debt, you must declare VAT on the recovered portion in the tax period in which payment is received.
Practical Tips for Accountants
Regularly review aged receivables and assess collectability.
Align VAT adjustments with financial write-offs.
Set up a workflow to ensure all bad debt claims are properly documented and reflected in VAT201 returns.
Example: Claiming Back VAT on Irrecoverable Debts
Your client (a VAT vendor) sold goods to XYZ Retail on 1 February 2024 for R23,000 (VAT inclusive at 15%). A proper VAT invoice was issued, and VAT was declared and paid to SARS in the February 2024 return.
Despite recovery efforts, only R11,500 had been received by 16 April 2025. On 15 May 2025, the remaining R11,500 was written off as irrecoverable.
Partial Debt Recovery and Write-Off
Original Sale (15% VAT rate)
Invoice Date: 1 February 2025
Invoice Total (VAT inclusive): R23,000
VAT Rate: 15% → tax fraction = 15/115
VAT output paid to SARS: R23,000 × 15/115 = R3,000
Partial Payment Received on 16 April 2025 (Before Write-Off)
Amount paid by customer: R11,500
VAT on this payment: R11,500 × 15/115 = R1,500
Net payment (excl VAT): R10,000
Outstanding balance: R11,500
Write-Off Bad Debt (15 May 2025)
The original VAT rate of 15% still applies for this adjustment.
VAT to be claimed as input (on bad debt): R11,500 × 15/115 = R1,500
Optional: Debt Recovered Later
If R2,300 of the written-off amount is unexpectedly paid in June 2025:
Still use 15% VAT (since the original invoice was before 1 May 2025)
VAT to declare as output tax: R2,300 × 15/115 = R300
💡VAT Rate Change and Its Impact
The new 15.5% VAT rate starts from 1 May 2025 and applies to all sales, services, and imports where the goods or services are supplied on or after that date. If you issue an invoice or get paid on or after 1 May, you must charge VAT at 15.5%. But if the supply happened before 1 May 2025, the old 15% rate still applies — even if the payment or a debt write-off happens later. For example, if you’re writing off a bad debt for a sale made in March, you must still use 15% when adjusting the VAT. Always use the rate that was in place at the time the goods or services were actually supplied.
Unsure how to do this? Download the CIBA Bad Debts and VAT Checklist to ensure that you have followed the correct processes.
📺 Learn more about VAT and other tax related topics by enrolling for CIBA’s expert-led webinars!
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