VAT bad debt relief: reclaiming the VAT on invoices your customer never paid

The problem it solves

Under standard VAT accounting you pay HMRC the VAT on an invoice in the return for the period you issued it — whether or not the customer ever pays. Bad debt relief lets you get that VAT back when the debt proves bad ^[1].

The conditions

• You have already accounted for and paid the VAT on the supply ^[1].
• The debt has been written off in your VAT accounts and transferred to a separate bad debts account ^[1].
• The debt is more than 6 months old, measured from the later of the due date and the date of supply ^[1].
• The value of the supply was not more than the customary selling price, and the debt has not been sold or factored ^[1].

Time limit and how to claim

As a general rule the claim must be made within 4 years and 6 months of the later of the date payment was due and the date of supply ^[1]. The relief is claimed by adding the VAT to the input tax box of your VAT Return ^[1]. If the customer later pays some or all of the debt, you must repay the corresponding proportion of the relief ^[1].

The customer's side

A VAT-registered customer that has not paid you within 6 months of the later of the date of supply and the due date must repay the input tax it reclaimed on your invoice ^[1]. Mentioning this in a late-stage reminder is a factual, and often effective, point.

Prevention beats relief

Relief only returns the VAT; the rest of the invoice is still lost. Consistent reminders from the day an invoice is due — with statutory interest stated for business customers — are what keep debts from reaching six months. The cash accounting scheme is an alternative for smaller firms that want to avoid paying VAT before they are paid ^[2].