VAT Bad Debt Relief UK 2026 — Reclaim VAT on Invoices Your Customers Never Paid

The Problem: VAT You Paid on Money You Never Got

Most VAT-registered businesses use standard VAT accounting — also called accrual or invoice accounting. Under this method, you account for output VAT (the VAT on your sales) at the point you issue the invoice, not when the customer pays. So if you raise an invoice for £6,000 plus £1,200 VAT in January, that £1,200 goes into Box 1 of your January-quarter VAT return and you pay it over to HMRC — regardless of whether the customer has settled up.

Now imagine the customer disappears, disputes the work in bad faith, or goes bust. You've done the job, you're out of pocket for your labour and materials, and on top of that you've paid HMRC £1,200 of VAT you never collected. VAT Bad Debt Relief is the mechanism that lets you reclaim that £1,200 once the debt has gone sour. It is purely about the VAT — separate from any income-tax or corporation-tax relief you might claim for writing the debt off against your profits.

The Conditions to Claim

You don't need to ask HMRC's permission to claim bad debt relief, and you don't fill in any special form. You simply reclaim it on your normal VAT return — but only once you genuinely qualify. There are five conditions, and you need to meet all of them.

• The debt is at least 6 months overdue. The clock runs from the later of the payment-due date or the date of supply. So a debt isn't eligible the moment it's late — you have to wait until it's been six months past due.
• You have written the debt off. The unpaid amount must have been written off in your VAT accounts — in practice, transferred to a separate "refunds for bad debts" account.
• You already accounted for and paid the VAT. You can only reclaim VAT you actually declared and paid to HMRC on the original supply.
• You didn't charge more than the normal selling price. The relief applies to goods or services sold at their ordinary open-market value, not at an inflated figure.
• You claim within the time limit. You must make the claim within 4 years and 6 months of the later of the payment-due date or the date of supply. Miss that window and the VAT is lost for good.

Note the symmetry between the 6-month minimum and the 4-year-6-month maximum: there's a wide window in which you can claim, but it does eventually close. Don't let old write-offs sit unclaimed.

How to Actually Claim It

Once you qualify, the claim itself is simple. You include the VAT element of the bad debt in Box 4 of your VAT return — the same box you use for input VAT (the VAT you reclaim on your purchases). You're effectively treating the reclaimed bad-debt VAT as though it were input tax for that period. There's no separate claim form and no advance approval needed.

What you do need is a clear record-keeping trail, because HMRC can ask you to evidence the claim. Keep:

• A separate refunds-for-bad-debts account recording each debt: the customer, the original invoice, the VAT charged, the date written off and the amount of relief claimed.
• Copies of the original VAT invoices for the supplies.
• Evidence the debt is genuinely overdue — your records of the payment-due date and the fact six months have passed.
• The write-off entry in your accounts.

Good bookkeeping software or a tidy spreadsheet makes this painless. The key point is that the relief is self-assessed: HMRC trusts you to claim correctly and keep the records to back it up.

Worked Example: A Builder Reclaims £1,200

Say you're a VAT-registered builder on standard accounting. In December you complete an extension and invoice the customer £6,000 plus £1,200 VAT — a total of £7,200 — with payment due within 30 days. You declare the £1,200 in Box 1 of your VAT return and pay it over to HMRC as normal.

The customer never pays. You chase, you send reminders, you eventually accept the debt is bad. Six months after the payment-due date, the £7,200 is still outstanding. You write the debt off in your accounts and move it to your refunds-for-bad-debts account. On your next VAT return, you include the £1,200 in Box 4. HMRC effectively refunds you that VAT — either reducing what you owe that quarter or paying it back. You're still out of pocket for the £6,000 of work itself, but at least you're no longer subsidising the VAT on a sale that never happened.

The Flip Side: If You Get Paid Later

Bad debt relief isn't a one-way street. If a customer who you'd written off later coughs up — in full or in part — you have to repay the relief proportionally. If they pay the whole £7,200 a year after you claimed, you repay the full £1,200 back to HMRC by adjusting Box 1 on the relevant return. If they pay half, you repay half. This keeps the VAT position honest: you only keep the relief on amounts that genuinely stayed unpaid.

There's a mirror rule that's worth knowing if you're ever on the buying side. If you, as a customer, reclaim input VAT on a supplier's invoice but then don't pay that supplier within six months of the due date, you're required to repay the input VAT you claimed. The system is symmetrical: the supplier can reclaim the output VAT they paid on a debt that went bad, and the customer who didn't pay has to give back the input VAT they'd reclaimed. So if your own cash flow leaves a supplier unpaid for over six months, make sure you account for that repayment.

If You're on the VAT Cash Accounting Scheme

Here's an important distinction. If you use the VAT Cash Accounting Scheme, you don't need bad debt relief at all — and you can't claim it. Under cash accounting, you only account for output VAT when your customer actually pays you, and you only reclaim input VAT when you pay your suppliers. So if a customer never pays, you never declared the output VAT in the first place. There's nothing to reclaim, because you never handed it over.

This is one of the genuine advantages of cash accounting for smaller trades with patchy-paying customers: unpaid invoices simply never trigger a VAT liability. The scheme is available to businesses with a VAT-taxable turnover of £1.35 million or less. If late payment is a recurring headache, it's worth discussing cash accounting with your accountant — though it has trade-offs of its own, such as delaying when you can reclaim input VAT on your own purchases. Bad debt relief, by contrast, exists precisely because standard accounting makes you pay the VAT up front.

Common Mistakes to Avoid

• Claiming too early. The debt must be six months past the due date — not six months from the invoice date if your terms gave the customer longer to pay. Claiming before the debt qualifies invites a correction.
• Forgetting to write the debt off first. The write-off in your accounts is a condition, not an afterthought. No write-off, no valid claim.
• Letting the time limit lapse. Four years and six months sounds generous, but old debts get forgotten. Review your aged-debtor list regularly so nothing falls off the edge.
• Not adjusting when partly paid. If the customer makes a partial payment after you've claimed, you owe back a proportional slice of the relief. Track it.
• Double-counting the income-tax write-off. Bad debt relief is the VAT mechanism only. Writing the net amount off against your taxable profit is a separate, legitimate relief — but don't confuse the two figures.

Stop the Bad Debt Happening in the First Place

Reclaiming VAT softens the blow, but the best bad debt is the one you never incur. A few habits keep unpaid invoices rare: take a deposit on larger jobs, invoice promptly the day the work finishes, set clear payment terms in writing before you start, and chase politely but firmly the moment an invoice goes overdue. The customers who never pay are usually the ones who showed warning signs early — vague about budget, slow to confirm details, reluctant to put anything in writing.

It also helps to know which marketing brings in the customers who actually pay on time. Not every lead source is equal — some channels deliver reliable, solvent customers and others deliver tyre-kickers and disputes. Tracking which adverts, referrals or directory listings turn into paying jobs (something a tool like Trade2Base is built to help trades do) means you can spend your marketing budget where it brings in customers who settle their invoices, not ones who become next year's bad debt claim.

Quick Reference: VAT Bad Debt Relief UK 2026

A Word of Caution

VAT rules change and individual circumstances vary. The conditions above reflect the position for 2026, but before you make a claim — especially a large one, or one involving partial payments, related parties or disputed debts — check with your accountant and read HMRC's own guidance in VAT Notice 700/18: relief from VAT on bad debts. Getting the timing and the records right is what keeps a legitimate claim clean if HMRC ever asks to see it.