VAT Bad Debt Relief: Claiming Back VAT on Unpaid Invoices

What Is VAT Bad Debt Relief?

Under standard VAT accounting, you account for output VAT when you issue an invoice — regardless of whether your customer has paid. If that customer never pays, you've effectively paid VAT to HMRC on income you didn't receive.

Bad debt relief lets you reclaim that VAT, but only after certain conditions are met.

The Conditions

You can claim bad debt relief when:

1. The debt is at least 6 months old from the later of the payment due date or the date of supply
2. You've already accounted for the VAT on your VAT return and paid it to HMRC
3. The debt has been written off in your accounting records
4. The debt hasn't been sold or factored (you still own the debt)
5. The value of the supply didn't exceed the open market value (anti-avoidance rule)

How to Claim

Include the VAT amount as input tax in Box 4 of your VAT return. You don't need to write to HMRC separately — simply include it in your normal return.

Example: You invoiced a customer £6,000 plus £1,200 VAT = £7,200 in March 2025. By December 2025, they still haven't paid and six months have passed. You write off the debt and claim £1,200 as input tax on your next VAT return.

Record-Keeping

You must keep detailed records of bad debt claims:

• The original invoice (date, amount, VAT)
• Evidence that the debt is at least 6 months old
• Evidence that it's been written off in your records
• The VAT return on which you originally accounted for the output VAT
• The VAT return on which you claimed the bad debt relief

Keep these records for at least 6 years.

What If the Customer Later Pays?

If you've claimed bad debt relief and the customer subsequently pays (in full or in part), you must repay the VAT you reclaimed. Account for the output VAT again on the VAT return covering the period in which you receive payment.

Cash Accounting Alternative

If bad debts are a regular problem, consider the Cash Accounting Scheme. Under cash accounting, you only account for output VAT when you receive payment — so bad debts automatically never attract VAT. No need to wait six months or make separate claims.

With Accounted, Penny tracks your aged debtors and automatically identifies invoices that qualify for bad debt relief, ensuring you never miss a claim.

Reclaim VAT on unpaid invoices. Start your free trial with Accounted and let Penny manage the process.