19. October 2026

VAT Bad Debt Relief: Can You Reclaim VAT on Unpaid Invoices?

Article written by PR Accountants LTD in the category VAT

Paying VAT before the customer pays you

A VAT registered business may issue an invoice, declare the output VAT on its VAT Return and pay that VAT to HM Revenue and Customs before the customer settles the bill.

If the customer pays late, the business has a temporary cashflow problem. If the customer never pays, the business can appear to have paid VAT on money it has not received.

VAT Bad Debt Relief can provide a remedy. It allows an eligible business to reclaim VAT that it has already accounted for on a qualifying unpaid debt.

The relief is valuable, but it is not automatic. The business must wait for the required period, write the debt off correctly in its VAT records, make the claim within the time limit and retain supporting evidence. If the customer later pays some or all of the debt, the corresponding VAT must be paid back to HMRC.

This guide explains the rules, calculations, records and common errors businesses should consider before making a claim.

What is VAT Bad Debt Relief?

VAT Bad Debt Relief is a mechanism for recovering output VAT that a business has already paid to HMRC where the related customer debt has become sufficiently old and remains unpaid.

It does not reimburse the net value of the lost sale. It deals only with the VAT element of the qualifying unpaid amount.

It also does not cancel the customer's debt. A business can write an amount off in its VAT accounts for the purpose of claiming relief while continuing legitimate recovery action. If money is recovered later, the VAT position must be adjusted.

The relief is mainly relevant to businesses using normal invoice accounting for VAT. Under invoice accounting, VAT is normally declared according to the applicable tax point, even if the customer has not yet paid.

A business using the VAT Cash Accounting Scheme normally declares output VAT when payment is received. It therefore usually has no output VAT to reclaim on an unpaid invoice. The VAT Cash Accounting Scheme is discussed separately later in this week's VAT series.

Why the relief matters for cashflow

Consider a consultant who invoices a client £12,000, including £2,000 VAT.

If the invoice falls within the consultant's VAT period, the £2,000 may have to be included as output VAT even though the client has not paid. The consultant has funded that VAT from other business cash.

If the debt remains unpaid, the business suffers two effects:

It has not collected the £10,000 net fee
It has already paid £2,000 of VAT to HMRC

Bad Debt Relief does not restore the lost fee, but it may allow the £2,000 VAT to be reclaimed once all conditions are met.

For businesses with long credit terms, customer disputes or a small number of high-value customers, missing a valid claim can leave a material amount of cash with HMRC unnecessarily.

The main conditions for claiming VAT Bad Debt Relief

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

Broadly, the business must satisfy all of the following.

The supply was made and VAT was accounted for

The business must have made a taxable supply and accounted for the VAT on that supply to HMRC.

If output VAT was never declared, there is no VAT to recover through Bad Debt Relief. The correct action may instead be to correct the VAT records or an earlier VAT Return.

The consideration has not been paid

The customer must not have paid the relevant amount.

If an invoice has been paid in part, relief may be available only on the unpaid portion. Payments must be allocated correctly, particularly where one customer has several outstanding invoices.

The debt is at least six months old

The business must wait six months after the later of:

The date payment was due
The date the goods or services were supplied

The later date matters. A business should not simply count six months from the invoice date without checking the supply date and contractual due date.

The debt has been written off in the VAT accounts

The unpaid amount must be written off in the business's day-to-day VAT accounts and transferred to a separate bad debt account.

This is an accounting and record-keeping requirement. It does not necessarily mean that the business must abandon all attempts to collect the debt.

The claim is made within the time limit

The claim must normally be made within four years and six months of the later of:

The date payment was due
The date of supply

The claim window is generous, but old debts can easily be missed when VAT reviews focus only on the current quarter.

The debt has not been sold or legally assigned

Relief is not available where the debt has been sold or factored under a valid legal assignment.

Invoice finance arrangements vary. A business should establish whether the provider has taken a legal assignment of the debt and whether any payment, indemnity or insurance proceeds affect the unpaid amount.

The value of the supply is not above the normal selling price

The value of the supply must not exceed its open market value or customary selling price in the circumstances covered by the rules.

This prevents artificially inflated values from generating excessive relief.

How to calculate the six-month waiting period

The six-month rule is a frequent source of error.

Suppose a business supplies services on 10 January and issues an invoice on the same day. The invoice terms require payment by 9 February.

The due date is later than the supply date, so the six-month period begins from 9 February. The debt does not become eligible merely because six months have passed since 10 January.

If the contract required an advance payment before the supply, the supply date might be later than the payment due date. In that case, the later supply date could control the start of the waiting period.

The safest process is to record both dates and calculate eligibility from the later one.

The business must also ensure that the debt remains unpaid at the time of the claim and that the record has been transferred to the separate bad debt account.

Worked example: a fully unpaid invoice

Oak Consulting Ltd issues an invoice for £12,000 on 2 March 2026.

The invoice consists of:

Net fee: £10,000
VAT at 20%: £2,000
Total due: £12,000

The work was completed on 2 March and the payment date was 1 April 2026.

Oak Consulting includes the £2,000 output VAT in the relevant VAT Return and pays HMRC. The customer does not pay.

The relevant six-month period runs from 1 April because that is later than the date of supply. Subject to all other conditions, the debt may become eligible on 1 October 2026.

Oak Consulting writes the debt off in its VAT accounts, transfers it to the bad debt account and claims £2,000 in Box 4 of the VAT Return covering the claim date.

The company can still pursue the customer. If it later receives payment, it must account for the VAT element recovered.

Worked example: part of an invoice is paid

Suppose a business issues a standard-rated invoice for £6,000, including £1,000 VAT. The customer pays £2,400 and leaves £3,600 outstanding.

If the payment is allocated to that invoice and all Bad Debt Relief conditions are met, the unpaid amount is £3,600.

For a wholly standard-rated VAT-inclusive amount, the VAT fraction is one-sixth.

The potential claim is therefore:

£3,600 divided by 6 equals £600.

The business cannot reclaim the whole £1,000 of VAT because part of the invoice has been paid.

If the invoice contains supplies at different VAT rates, a simple one-sixth calculation may be wrong. The unpaid amount must be linked to the relevant supplies and rates.

How customer payments should be allocated

Payment allocation becomes important when a customer owes several invoices.

HMRC's general approach is that payments are normally allocated to the earliest supply unless the customer clearly specifies which invoice is being paid and that invoice is settled in full.

Businesses should avoid changing allocations after the event merely to increase a Bad Debt Relief claim.

Good records should show:

The payment date
The amount received
The customer's remittance advice
The invoice or invoices to which the payment was applied
Any agreed settlement or credit
The balance remaining after allocation

Accounting software can help, but the ledger allocation should agree with the commercial evidence.

Where is the claim entered on the VAT Return?

An eligible claim is normally included as input tax in Box 4 of the VAT Return for the period in which the claim is made.

The net value of the debt is not added to purchases in Box 7 merely because Bad Debt Relief is claimed. The business should follow its software process carefully so that only the correct VAT adjustment reaches the return.

The claim should be supported by the VAT ledger and separate bad debt account. A journal with no underlying invoice or eligibility calculation is not enough.

What must the separate bad debt account contain?

The bad debt account is central to the evidence for the claim.

For each debt, the business should retain details including:

The amount written off
The VAT attributable to that amount
The VAT period in which the VAT was originally accounted for and paid
The VAT period in which relief is claimed
The total amount of the supply
The invoice date and identifying number
The customer's name
The date payment was due
The date the debt became six months old
Details of any payments received
Details of any later recovery and VAT repaid to HMRC

The records should allow someone reviewing the VAT Return to trace the claim from the original invoice to the sales ledger, VAT account, bad debt account and bank activity.

HMRC requires the specific Bad Debt Relief records to be retained for four years from the date of the claim. Other VAT records are generally subject to the usual VAT retention period, which is normally six years. Keeping the complete evidence together for the longer applicable period is often the simplest practical approach.

Do you need to prove that the customer is insolvent?

No. Formal insolvency is not a universal condition of VAT Bad Debt Relief.

The business must meet the statutory conditions, including the six-month period and the write-off in the VAT accounts. It does not always have to wait for liquidation, bankruptcy or a court judgment.

However, the decision to write off a debt should be genuine and supported by the circumstances. Evidence may include:

Aged debtor reports
Repeated payment reminders
Correspondence with the customer
A dispute record
A payment plan that has failed
Credit-control notes
Information about insolvency or cessation
Legal recovery advice

This evidence supports the commercial history of the balance even where formal insolvency has not occurred.

Does writing off the debt stop recovery action?

Not necessarily.

Writing the amount off for VAT purposes does not release the customer from the legal obligation to pay. The business may continue recovery action, subject to commercial judgement and legal advice.

If the debt is later recovered, the VAT consequences must be dealt with. A business should therefore keep written-off debts visible in a controlled record rather than deleting the customer or invoice from the system.

What happens if the customer pays after relief has been claimed?

If a business receives payment after claiming Bad Debt Relief, it must repay the VAT element attributable to that recovery.

The adjustment is normally included as output VAT in Box 1 of the VAT Return for the period in which the payment is received.

If only part of the debt is recovered, only the corresponding part of the relief is reversed.

For example, assume £1,000 of VAT was reclaimed on a wholly standard-rated debt. The customer later pays £3,000 of the £6,000 VAT-inclusive balance.

The VAT element of the recovery is £500, using the one-sixth VAT fraction. The business would normally account for £500 in Box 1.

The bad debt account should show the recovery and the return on which the VAT was repaid.

What if the business uses VAT cash accounting?

The VAT Cash Accounting Scheme normally removes the need for Bad Debt Relief on scheme transactions because output VAT is not declared until the customer pays.

If the customer never pays, the business normally never accounts for that output VAT.

This does not mean cash accounting is automatically better. A cash accounting business also normally waits until it pays suppliers before reclaiming input VAT. Eligibility limits, excluded transactions and transition rules apply.

Read VAT Cash Accounting Scheme: Could It Improve Cashflow? for the full comparison.

What if a debt has been factored or insured?

Factoring, invoice discounting, credit insurance and guarantees can change the analysis.

Questions to resolve include:

Has the debt been legally assigned?
Did the finance provider purchase the receivable?
Has the business received an advance or a final settlement?
Is the customer still legally liable to the business?
Has an insurer or guarantor paid all or part of the loss?
Is the payment a loan secured on the invoice or consideration for its transfer?

The accounting label used in the bookkeeping software is not conclusive. The contract and legal arrangement matter.

A business should review the agreement before claiming relief rather than assuming that every unpaid invoice remains eligible.

What if the invoice is disputed or cancelled?

An unpaid invoice is not always a bad debt.

If the price has been reduced, the supply has been cancelled or the original invoice was wrong, a credit note or VAT error correction may be required instead.

Bad Debt Relief is intended for valid consideration that remains due but unpaid. It should not be used to correct:

A duplicate invoice
An overcharge
Goods returned under an agreed price reduction
A cancelled service for which no amount remains due
VAT charged at the wrong rate
An invoice issued to the wrong customer

The correct route depends on why the balance is outstanding.

This distinction is particularly important for advance payments and cancellations. Read VAT on Deposits, Advance Payments and Cancellations Explained for the related tax point and refund rules.

The customer's unpaid input VAT adjustment

The supplier's Bad Debt Relief rules have a corresponding effect for a VAT registered customer.

Where a customer has reclaimed input VAT but has not paid the supplier within six months of the relevant date, the customer may have to repay that input VAT to HMRC.

This requirement can apply even if the supplier has not yet claimed Bad Debt Relief.

The customer should monitor unpaid creditor balances and make the required adjustment at the correct time. If the supplier is later paid, the customer may be able to reclaim the input VAT again, subject to the normal conditions.

This is why aged creditor reviews matter as well as aged debtor reviews.

Bad Debt Relief and the business's accounts

The VAT adjustment and the accounting treatment of the debt are connected, but they are not identical.

The accounts may recognise an impairment, expected credit loss or bad debt expense based on the applicable accounting framework and the evidence available. The tax treatment of that expense is a further question.

The VAT claim has its own statutory conditions and dates.

A business should therefore avoid assuming that:

An accounting provision automatically creates a VAT claim
A VAT write-off determines the legal status of the debt
A Corporation Tax deduction and VAT relief must arise in the same period
Removing an invoice from a customer statement is sufficient evidence

The bookkeeping should record each element clearly.

A practical quarterly review process

Bad Debt Relief is easiest to manage through a recurring review rather than an annual search.

At each VAT quarter, the business can follow this process.

1. Reconcile the sales ledger

Confirm that sales invoices, receipts, credit notes and customer allocations are complete and agree with the control account.

2. Review the aged debtor report

Identify balances that are more than six months beyond the relevant later date, not merely six months beyond the invoice date.

3. Confirm that output VAT was paid

Trace the original invoice to the VAT Return on which the output tax was declared.

4. Check for part payments and credits

Reduce the eligible amount for cash received, agreed discounts, credit notes, contra entries or settlements.

5. Review finance and insurance arrangements

Confirm that the debt has not been sold or assigned and identify any third-party recovery.

6. Write off the qualifying amount correctly

Make the required entry in the VAT accounts and transfer the debt to the separate bad debt account.

7. Calculate the VAT at the original rate

Use the VAT attributable to the unpaid amount. Do not automatically use the current VAT rate if the original supply had a different liability.

8. Record the claim in Box 4

Ensure the accounting entry maps to the correct part of the VAT Return without inflating purchase values.

9. Preserve the evidence

Keep the invoice, contract, due date, VAT Return evidence, payment history, correspondence and bad debt account record together.

10. Monitor later recoveries

Create a process to identify payments against written-off debts and repay the correct VAT promptly.

Common VAT Bad Debt Relief mistakes

Claiming six months after the invoice date

The test uses the later of the payment due date and date of supply. The invoice date may not be the correct starting point.

Claiming VAT that was never declared

The business must have accounted for and paid the VAT before it can reclaim it as a bad debt.

Failing to write the debt off

An aged debtor report alone does not meet the separate accounting requirement.

Claiming the full VAT after a part payment

Relief is limited to the VAT attributable to the unpaid balance.

Treating a price reduction as a bad debt

Where consideration has genuinely been reduced, the correct route may be a credit note rather than Bad Debt Relief.

Ignoring factored or assigned debts

A legal assignment can prevent a claim. The finance agreement must be checked.

Missing the four-year-and-six-month deadline

Old debts should be reviewed before the claim window closes.

Deleting the invoice from the system

The original invoice and audit trail must remain available. A controlled write-off is not the same as erasing the transaction.

Failing to reverse the claim after recovery

Money collected later creates a VAT adjustment. Written-off accounts should remain linked to bank receipts.

Confusing VAT relief with a complete financial recovery

The net loss remains unless the customer pays, an insurer settles or another recovery is available.

Questions to ask before making a claim

Before including Bad Debt Relief in a VAT Return, confirm:

Was the original supply taxable?
Was the output VAT declared and paid?
What was the date of supply?
What was the contractual payment due date?
Have six months passed from the later date?
Has any payment, credit or contra been applied?
Has the debt been sold, factored or legally assigned?
Has an insurer, guarantor or connected party paid anything?
Has the debt been written off in the VAT accounts?
Is there a complete separate bad debt account record?
Is the claim within four years and six months?
Can the business identify and account for any later recovery?

If any answer is unclear, the claim should be reviewed before filing.

Frequently asked questions

Can I claim as soon as I decide that the customer will not pay?

No. The statutory waiting period must have passed, even if the customer has entered insolvency or said that payment will not be made.

Must I take the customer to court first?

Court action is not a general condition of the relief. The business must meet HMRC's conditions and make a genuine write-off in its VAT records.

Can I still chase the customer after claiming?

Yes. The debt can remain legally recoverable. If money is later received, the corresponding VAT must be repaid to HMRC.

Can I claim relief on only part of an invoice?

Yes, where that part remains unpaid and all conditions are met. The calculation must reflect the VAT attributable to the unpaid amount.

Does the claim go in Box 1 or Box 4?

The initial Bad Debt Relief claim is normally included in Box 4. A later repayment of relief following recovery is normally included in Box 1.

Can I claim if the customer disputes the invoice?

Possibly, if the original debt remains valid, unpaid and all conditions are met. If the dispute results in an agreed price reduction or cancellation, a credit note may be the correct treatment instead.

Can a cash accounting business claim Bad Debt Relief?

Usually it is not needed for sales dealt with under cash accounting because output VAT is declared only when payment is received. Transactions outside the scheme require separate consideration.

What happens if I discover an old eligible debt?

Check the four-year-and-six-month time limit immediately. Reconstruct the supporting records and confirm that every condition was met before including a claim.

Is a customer insolvency notice enough evidence?

It may support the write-off, but it does not replace the other conditions, calculations and VAT records.

Can Bad Debt Relief be claimed on an exempt or zero-rated sale?

There is no output VAT to recover on an exempt or zero-rated amount. A mixed invoice may still contain eligible VAT on its taxable elements.

Timely debtor reviews protect cash

VAT Bad Debt Relief is not merely a year-end accounting adjustment.

It is a cashflow control that should form part of every VAT registered business's credit-control and VAT review process.

The business needs to know which invoices remain unpaid, when each debt becomes eligible, how much VAT relates to the outstanding amount and whether the evidence is complete. It must also track later recoveries so that VAT is returned to HMRC when required.

When those controls are built into the bookkeeping cycle, valid claims are less likely to be missed and unsupported claims are less likely to enter the VAT Return.

Speak to PR Accountants Ltd

PR Accountants Ltd helps businesses review VAT records, identify eligible bad debts, correct ledger problems and improve the connection between credit control, VAT reporting and cashflow planning.

We can assist with:

VAT Bad Debt Relief reviews
VAT Return preparation and review
Aged debtor and creditor reconciliations
Cash Accounting Scheme assessments
VAT registration and deregistration
VAT error corrections
Bookkeeping and management accounts
Cashflow forecasting
Construction VAT and domestic reverse charge reviews
HMRC correspondence and compliance support

If unpaid customer invoices are affecting cashflow, it is worth reviewing the VAT position before the claim deadline passes.

PR Accountants Ltd
Email: info@praccounting.co.uk
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Official guidance

This article provides general information and does not constitute personalised accounting, tax or legal advice. VAT treatment depends on the facts, contracts, dates, evidence and accounting method. HMRC guidance and legislation can change.