Key takeaways

  • VAT bad debt relief lets you reclaim VAT you have already paid HMRC on an invoice your customer has not paid.
  • You can claim once the debt is 6 months past the later of the payment due date and the date of supply, and you have written it off in your VAT accounts.
  • You must claim within 4 years and 6 months of the later of the payment due date and the date of supply.
  • You claim by adding the VAT to box 4 of your VAT Return, not by reducing your output tax in box 1.
  • To find the VAT in an unpaid VAT-inclusive amount at 20%, multiply it by the VAT fraction of 1/6.
  • If the customer later pays, you must repay the VAT element through box 1 of the VAT Return for that period.
  • Businesses on the Cash Accounting Scheme do not need bad debt relief, because they only pay VAT once the customer pays.

VAT bad debt relief lets you reclaim the VAT you paid HMRC on a sale your customer never paid for. You can claim once the debt is 6 months overdue and you have written it off in your VAT records, and you must claim within 4 years and 6 months. The claim goes in box 4 of your VAT Return.

What is VAT bad debt relief?

Bad debt relief refunds output VAT you accounted for on an invoice that was never paid. Under standard (invoice) accounting you pay VAT to HMRC when you issue the invoice, not when you are paid. If the customer never pays, you have paid VAT on money you did not receive.

The relief is set out in section 36 of the VAT Act 1994 and explained in HMRC’s VAT Notice 700/18, last updated 18 September 2025.

Who can claim bad debt relief?

You can claim if you meet every condition in section 2.2 of Notice 700/18. Use this checklist:

  • you supplied goods or services and charged VAT
  • you have already accounted for that VAT and paid it to HMRC
  • you have written off the debt in your day-to-day VAT accounts and moved it to a separate bad debt account
  • the debt has been unpaid for 6 months after the later of the payment due date and the date of supply
  • the value of the supply was not more than its open market value

Which applies to you?

  • If you use standard accounting, you can claim bad debt relief once the conditions are met.
  • If you use the Cash Accounting Scheme, you do not need it, because you only account for VAT when you are paid.
  • If you use a retail scheme, Notice 700/18 says relief is unnecessary.
  • If you have factored the debt outright, relief is not available, because the debt is no longer yours (section 3.12).

When can you claim, and what is the time limit?

The earliest you can claim is 6 months after the later of the payment due date and the date of supply. The latest is 4 years and 6 months after that same date.

MilestoneTiming
Earliest claim6 months after the later of the due date and the supply date
Claim deadline4 years and 6 months after the later of those dates
Keep the bad debt recordsAt least 4 years from the claim

Claim in the VAT Return for the period in which you first meet all the conditions, or a later one within the time limit.

How do you work out the claim?

You claim the VAT in the amount still unpaid. At the standard rate of 20%, the VAT in a VAT-inclusive amount is one-sixth, known as the VAT fraction.

Worked example

You invoice a customer £1,200 including VAT on 1 March 2026, payable by 31 March 2026. The customer pays £300 and then stops paying.

  1. The later date is the due date, 31 March 2026.
  2. The earliest claim date is 30 September 2026.
  3. The unpaid amount is £1,200 minus £300 = £900.
  4. The VAT to reclaim is £900 × 1/6 = £150.
  5. You enter £150 in box 4 of the VAT Return covering 30 September 2026 or a later one.

If you owe the same customer money, you must set that off first and claim only on the net debt (section 3.7). Part payments go against the earliest invoice first, unless the customer pays a specific invoice in full (section 3.2). The VAT calculator helps with the arithmetic.

How to claim VAT bad debt relief: step by step

  1. Check the date. Confirm 6 months have passed since the later of the due date and the supply date.
  2. Write off the debt in your VAT records and move it to a separate bad debt account.
  3. Work out the VAT in the unpaid amount using the VAT fraction.
  4. Add it to box 4 of your VAT Return as input tax. Do not reduce box 1.
  5. Keep the evidence: the VAT invoice, the bad debt account and proof the debt is unpaid.

Our guide on how to complete a VAT return shows where each figure goes.

What records do you need to keep?

Section 2.5 of Notice 700/18 says the bad debt account must show the customer’s name, invoice details, the amount written off, the VAT claimed and its VAT period, and any payments received. Keep the VAT invoices too; HMRC can ask for them on a VAT inspection.

What if the customer pays later?

If the customer pays after you have claimed, you must repay the VAT element of the payment. Enter it in box 1 of the VAT Return for the period in which the money arrives (section 3.14).

Your customer has a matching duty. If they have not paid you within 6 months of the relevant date, they must repay the input tax they reclaimed on your invoice (section 4.1). This applies whether or not you claim relief.

Frequently asked questions

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

You must wait 6 months from the later of the payment due date and the date of supply.

Is there a time limit for claiming bad debt relief?

Yes. You must claim within 4 years and 6 months of the later of the payment due date and the date of supply.

Which box on the VAT Return do I use for bad debt relief?

Box 4. You add the VAT as input tax rather than reducing the output tax in box 1.

Do I need to tell my customer I am claiming bad debt relief?

Not for current supplies. Notification letters were only needed for supplies made between 26 November 1996 and 30 April 1997.

Does the customer have to repay the VAT they reclaimed?

Yes. If they have not paid you within 6 months of the relevant date, they must repay the input tax they claimed on that invoice.

Can I issue a credit note instead of claiming bad debt relief?

No. HMRC says you cannot issue a credit note just because a customer has not paid; credit notes are for errors or agreed price reductions.

Sources

Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance on 6 November 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.