VAT Bad Debt Relief: Claim VAT Back on Unpaid Invoices

Quick answer: If you are VAT-registered, account for VAT when you invoice (not when you are paid), and a customer never pays, you can reclaim the VAT you already handed to HMRC — but only after the debt has been unpaid for at least 6 months from the later of the supply date and the payment due date, and only once you have written the debt off in your accounts. The claim goes in Box 4 of your VAT return, and it must be made within 4 years and 6 months of that same later date. If the customer pays later, you repay the VAT element of whatever you receive in Box 1. The relief covers the VAT only — the unpaid net amount itself is a commercial loss, not a VAT refund.

The trap bad debt relief fixes

Under standard VAT accounting, you account for output VAT when you make the supply — normally the invoice date — whether or not the customer has paid. Invoice £6,000 plus £1,200 VAT, put £1,200 in Box 1, pay it to HMRC, and then the customer goes quiet. You are out of pocket twice: the £6,000 never received, and the £1,200 of VAT paid on money that never arrived.

Bad debt relief, set out in VAT Notice 700/18 under section 36 of the VAT Act 1994, exists to unwind the second of those losses. It simply returns the VAT you accounted for on a supply you were never paid for, once the conditions are met. It does not make the customer pay, and it does not write off the commercial debt for income or corporation tax purposes.

One situation needs no relief at all: businesses on the cash accounting scheme only account for VAT when the customer actually pays, so there is no VAT already paid to reclaim. The same applies to retailers on a retail scheme that adjusts daily takings for opening and closing debtors.

The seven conditions, in plain English

HMRC's conditions are cumulative: fail one and the claim fails.

1. You have already accounted for the VAT and paid it to HMRC. Relief refunds tax you have actually borne; if the VAT is still unpaid in an unfiled return, or you are on cash accounting, there is nothing to reclaim yet.
2. You have written the debt off in your day-to-day VAT accounts and moved it to a separate bad debt account. A debt still carried as a normal debtor, in the hope it will be paid next month, does not qualify.
3. The value of the supply is no more than the customary selling price. You cannot inflate an invoice, claim relief on the inflated VAT, and pocket the difference.
4. The debt has not been paid, sold or factored under a valid legal assignment. Selling a debt outright to a factor ends your claim. If the agreement allows reassignment, relief becomes available again only once the debt has actually been reassigned.
5. The debt has been unpaid for 6 months from the later of the payment due date and the supply date. This is the clock that matters most (see below).
6. For goods supplied before 19 March 1997, ownership must have passed to the customer. This is now a historical footnote for almost every business, but it remains in the notice.
7. For supplies to a VAT-registered customer between 26 November 1996 and 30 April 1997, you must have sent them a notice of your claim. Again historical. For modern supplies no notification is needed — but a VAT-registered customer who has not paid within 6 months must still monitor the position and repay their own input tax (see below).

The supply must also have been made on or after 1 April 1989. In practice every live claim today clears that test easily.

The 6-month clock: which date starts it?

The rule is "6 months from the later of" two dates: the date of the supply, and the date payment was due and payable. The word "later" does the work, and getting it wrong is the most common reason claims are made too early.

Your payment due date is normally set by your credit terms, or any longer period agreed with the customer. With 30-day terms the clock runs from the end of those 30 days, not the invoice date. An agreed extension during a dispute restarts the clock — and moves your customer's clawback deadline too.

Worked example — the timeline. A consultancy supplies work on Tuesday 12 May 2026 and invoices £6,000 plus £1,200 VAT (£7,200 total) on 30-day terms. Payment is due on Thursday 11 June 2026. The later date is 11 June, so the 6-month period ends on Friday 11 December 2026. The business may claim in the return covering the date the conditions are met — not in an earlier period's return, even if filed later. The claim must be made by Wednesday 11 December 2030, 4 years and 6 months after 11 June 2026. Miss that outer deadline and the relief is gone, however genuine the debt.

The 6 months does not require court action, a debt-collection agency or proof of insolvency. A customer who has simply stopped answering still counts, once the period has run and the debt is written off.

How much you can claim

For a single supply where you received nothing, the claim is simply the VAT you accounted for and paid. The arithmetic matters when the customer paid something: you must work out how much VAT is embedded in the unpaid balance.

Worked example — part payment, single invoice. You invoice £3,000 plus £600 VAT, £3,600 in total. The customer pays £1,200 and then disappears. The unpaid balance is £3,600 − £1,200 = £2,400. The VAT fraction at the standard rate is 1/6, so the claim is £2,400 × 1/6 = £400. You claim £400 in Box 4 — not the full £600, because £200 of VAT was effectively covered by the payment received.

Where a customer owes for several supplies and pays without saying which invoice it covers, HMRC's attribution rule applies: the payment is treated as paying off the earliest supplies first. That matters because different rates produce different reclaimable amounts. If the customer specifies a supply and pays it in full, that specification governs. Supplies made on the same day are aggregated and treated as one supply, with VAT apportioned pro rata.

Three adjustments can reduce a claim before you even reach the fraction:

• Mutual debts. If you also owe the debtor money and can set it off, the claim is based on the net debt. HMRC's own example: a £720 debt (£600 plus £120 VAT) set against £115 you owe the debtor gives a net debt of £605, and a claim of £605 × 1/6 = £100.83.
• Security. If you hold an enforceable security against the debt, you must reduce the claim by the value of that security. Only a security that cannot be enforced leaves the full debt claimable.
• Guarantors and third parties. Money received from a guarantor, a director of the debtor company or any other third party reduces the relief by the amount paid. Full payment by a guarantor extinguishes the claim entirely.

If a customer pays everything except the VAT, or you forgot to charge VAT and later issued a supplementary invoice for it, relief is limited to the VAT element of the debt.

How to claim, and what records to keep

Claiming is undramatic: you include the VAT in Box 4 of the return covering the date you first meet all the conditions. There is no separate form, no prior approval, and no need to wait for HMRC to agree the debt is bad — which is also why claiming in too early a period is an error, not an administrative slip.

The record-keeping is strict. For each supply your separate bad debt account must show: the amount written off, the VAT claimed, the period claimed in, the total VAT charged, the period originally accounted for, any payment received, the customer's name, and the invoice date and number (or enough to identify the supply if no invoice was issued). Keep copies of the invoices too. These records must be kept for 4 years from the claim — on top of the general 6-year requirement in VAT Notice 700, so keeping them 6 years satisfies both.

Use our VAT calculator to check the VAT fraction on any unpaid balance before you enter the claim. Our how to file a VAT return guide explains which box each figure belongs in, and our VAT penalties guide covers what happens if a return containing a claim is filed late.

If the customer pays after you claim

Bad debt relief is reversible. If you claim relief and later receive payment, you must repay the VAT element of that payment in Box 1 of the return for the period in which you receive it, and show every such payment in your separate bad debt account.

Worked example — later payment. You invoice £5,000 plus £1,000 VAT, £6,000 in total, receive nothing, and claim the full £1,000 in Box 4 once the 6 months have run. The customer later pays £3,000. The repayment is calculated as claim × payment received ÷ consideration outstanding when the claim was made: £1,000 × £3,000 ÷ £6,000 = £500. You add £500 to Box 1. If the customer eventually pays in full, you repay the whole claim, and you end up exactly where you started — as you should, because the VAT has now genuinely been paid.

If you have deregistered by then, you no longer file returns — but the obligation does not vanish; HMRC's notice directs you to contact them for guidance. Do not treat deregistration as a write-off of the repayment duty.

The other side of the coin: repaying input tax you claimed

Bad debt relief has a mirror image that catches many businesses by surprise. If you receive a supply, reclaim the input VAT, and then fail to pay your supplier within 6 months of the relevant date — the supply date, or the later payment due date — you must repay the input tax you claimed. This section 26A clawback applies automatically for supplies after 1 May 1997: your supplier need not notify you, so you must monitor your own unpaid supplier invoices.

The repayment is calculated the same way, in reverse: it is based on the unpaid amount at the relevant date, and only on the input tax you actually deducted. If you originally deducted only 50% of the VAT, the clawback is 50% of the proportionate amount.

Worked example — clawback. You receive goods for £2,000 plus £400 VAT, £2,400 in total, and reclaim the full £400. By the relevant date you have paid only £600, leaving £1,800 unpaid. The repayment is £400 × £1,800 ÷ £2,400 = £300, entered as a reduction of input tax in Box 4 of the return covering the date the repayment became due. If you later pay the supplier, you reclaim the input tax again in proportion to the payment, in Box 4 of the period in which you pay.

Two qualifications soften the clawback. If you are in dispute and the supplier agrees to extend the payment date, the 6 months runs from the extended date; if they do not agree, the original date stands and you repay only on the unpaid element. If insolvency proceedings begin after the supply but before the repayment date falls due, an extra-statutory concession means no repayment is required. And if you buy a business and take over the seller's VAT registration using form VAT68, you inherit both sides: the seller's relief entitlement and the clawback obligation.

Common mistakes that cost businesses money

1. Claiming before the 6 months have run, measured from the invoice date instead of the later due date.
2. Claiming the full VAT on a partly paid invoice instead of the VAT fraction of the unpaid balance.
3. Leaving the debt in the normal sales ledger instead of writing it off into a separate bad debt account.
4. Claiming on cash accounting, where no VAT was ever paid on the unpaid amount.
5. Forgetting the 4-year-and-6-month deadline and discovering old debts too late.
6. Claiming a debt factored under an absolute assignment, or already paid by a guarantor.
7. Failing to repay relief in Box 1 when the customer eventually pays — the error HMRC most often finds on enquiry.
8. Never diarising the 6-month clawback on unpaid supplier invoices.
9. Keeping no separate bad debt account, so even a valid claim cannot be evidenced.

Frequently asked questions

Educational information and estimates. These tools do not submit VAT returns or determine the treatment of a specific transaction.