Bad Debt Relief UK VAT: Complete Guide to Eligibility, Evidence Requirements and Bookkeeping Treatment

VAT bad debt relief lets a VAT-registered business reclaim VAT it has already accounted for and paid to HMRC on a supply that remains unpaid. For most current supplies, you must wait six months from the later of the payment due date and the date of supply. The unpaid amount must have been written off in your day-to-day VAT accounts and transferred to a separate bad debt account. The claim is included in box 4 of the VAT return and must normally be made within four years and six months of the same relevant date.

What VAT Bad Debt Relief Is and Why It Exists

Under normal VAT accounting, output VAT can become due before your customer has paid you. If the customer later fails to pay, bad debt relief can allow you to recover the VAT relating to the unpaid amount.

The relief is provided by section 36 of the VAT Act 1994 and the supporting VAT Regulations. It is a statutory relief, but every relevant condition must be met before a claim can be made.

If you use the Cash Accounting Scheme, bad debt relief will generally be unnecessary because you normally account for VAT when customers pay you. The same principle can apply under retail schemes that adjust gross takings for opening and closing debtors.

The Eligibility Conditions You Must Meet

HMRC’s VAT Notice 700/18 sets out the conditions.

Historical supplies made before May 1997 can be subject to additional rules, but those conditions will rarely affect current claims.

Timing: The Six-Month Wait and the Four-Year-Six-Month Deadline

You must wait at least six months from the later of:

• the date payment became due and payable; or
• the date of supply.

If you offer 30-day credit terms, the six-month period will normally run from the payment due date rather than the invoice date. If you later agree a longer payment period with the customer, that can alter the relevant due date.

You cannot claim on a VAT return for a period before entitlement arises. For supplies made after 30 April 1997, the normal deadline is four years and six months from the later of the due date and date of supply.

Adding a flag to your aged debtors reporting can help prevent qualifying debts being overlooked.

How Much You Can Actually Claim

Relief is calculated on the VAT contained in the amount that remains unpaid.

For a standard-rated supply at 20%, the VAT fraction of a VAT-inclusive outstanding amount is 1/6. If an unpaid invoice totals £1,200 including VAT, the VAT element is £200.

If the customer has made a part payment, relief is available only on the amount still outstanding.

Where a customer owes you for several supplies and makes a payment without identifying a particular supply, HMRC normally requires the payment to be allocated to the earliest supply first. If the customer identifies a particular supply and pays that supply in full, the payment can instead be attributed to that supply.

The Evidence HMRC Will Expect You to Hold

You must keep appropriate records supporting each claim, including the relevant VAT invoice or equivalent document and a separate bad debt account.

HMRC requires the bad debt account to record details including:

• the amount written off;
• the VAT claimed as bad debt relief;
• the VAT period in which relief was claimed;
• the total VAT originally charged;
• the period in which that VAT was originally accounted for;
• payments received;
• the customer’s name; and
• the relevant invoice date and number.

The specific bad debt relief records must be retained for four years from the date of the claim. This does not replace the normal requirement to retain VAT records for six years.

A disciplined sales ledger process makes this considerably easier.

The Bookkeeping Treatment: Journal Entries and VAT Return Boxes

Once all the conditions are satisfied, include the VAT being reclaimed in box 4 of the VAT return covering the period in which you became entitled to relief.

The bookkeeping entries depend on your software and chart of accounts. Typically, writing off the invoice removes the customer balance and recognises the bad debt expense. The VAT element recoverable from HMRC is then recognised through the VAT control account, reducing the net cost of the bad debt.

Accounting software may automate these entries, but check that the invoice is not claimed twice and that any later recovery is correctly reflected.

The Clawback Trap: What Happens If You Are Paid After Claiming

If the customer later pays all or part of a debt on which you have claimed relief, you must repay the corresponding VAT to HMRC.

The repayment is entered in box 1 of the VAT return for the period in which you receive the payment. HMRC’s formula is:

Original relief claimed × payment received ÷ amount outstanding when the claim was made

For example, if you claimed £200 on an outstanding £1,200 debt and later receive £750:

£200 × £750 ÷ £1,200 = £125

You therefore repay £125 through box 1. The subsequent payment must also be recorded in the separate bad debt account.

Special Situations That Change Your Claim

HMRC confirms these treatments in Notice 700/18.

If you regularly use a retention of title clause or deal with mutual debts and set-off, check the position before calculating the claim.

Common Mistakes That Can Invalidate a Bad Debt Relief Claim

Typical problems include:

• claiming before six months have elapsed from the correct relevant date;
• failing to transfer the written-off amount to a separate bad debt account;
• issuing a credit note simply because the customer has failed to pay;
• claiming VAT on the original invoice rather than the remaining unpaid balance;
• failing to repay the appropriate VAT when money is later recovered;
• missing the four-year-six-month deadline; and
• claiming while a debt remains absolutely assigned to a factor.

HMRC specifically states that a credit note cannot be issued simply because a customer has failed to pay. A credit note requires a genuine mistake, overcharge or agreed reduction in the value of the supply.

Preventing Bad Debts Before They Reach This Stage

VAT bad debt relief only recovers eligible VAT. It does not recover the underlying net invoice value, so preventing and recovering overdue debts remains more valuable than relying on tax relief afterwards.

Good practice includes credit checking before offering terms, building appropriate onboarding, KYC and credit limits into your process and monitoring credit control KPIs.

Writing a debt off for VAT accounting purposes does not itself mean you must stop pursuing payment. Where recovery remains commercially sensible, consider the appropriate collection and legal options before abandoning the debt.

For relevant debts, our guide to the pre-action protocol for debt claims explains the steps before proceedings. Businesses may also have a right to claim statutory interest on qualifying late commercial payments.

Where a debtor has entered a formal insolvency process, read our guide to recovering debt from insolvent customers. VAT bad debt relief can still be relevant where its statutory conditions are satisfied. HMRC’s updated insolvency guidance continues to direct office holders to Notice 700/18 for the applicable rules.

Frequently Asked Questions

How long do I have to wait before claiming VAT bad debt relief?

Normally, at least six months from the later of the date payment was due and payable and the date of supply. You cannot claim earlier simply because you believe the customer will never pay.

What is the deadline for claiming bad debt relief?

For most current supplies, the claim must be made within four years and six months of the later of the payment due date and the date of supply.

Can I claim bad debt relief if I use the Cash Accounting Scheme?

Normally there is no bad debt relief to claim because under cash accounting you generally account for output VAT only when the customer pays you.

What happens if my customer pays me after I have already claimed the relief?

You must repay the VAT attributable to the later payment. Enter the amount being repaid in box 1 of the VAT return for the period in which you receive the payment.

Making the Most of the Relief You Are Entitled To

VAT bad debt relief can prevent unpaid invoices from leaving you permanently out of pocket for VAT already paid to HMRC. The key is to apply the six-month rule correctly, maintain the required bad debt account, claim within the time limit and continue tracking later recoveries.

If unpaid invoices are becoming a recurring issue, the wider credit control and recovery process is usually worth addressing before more debts reach write-off stage. Speak to our team for a free, no-obligation consultation on recovering what you are owed.