Under standard VAT accounting, output VAT is due on an invoice when it is issued, whether or not the customer pays. When a debt goes bad, bad debt relief lets the business recover that VAT. It does not apply to businesses on the cash accounting scheme, because they never paid the VAT in the first place.
Conditions
All of these must be met:
- The supply was made and the output VAT was accounted for and paid.
- The debt has been written off in the VAT account and the accounts (a separate “refunds for bad debts” record).
- At least six months have passed since the later of the date of supply and the date payment was due.
- The claim is made within four years and six months of that later date.
- The value of the supply was not more than the customary selling price.
Insolvency of the customer is not required, and the business does not have to stop chasing the debt.
Making the claim
The VAT on the unpaid amount goes in box 4 of the VAT return as input tax. It is not deducted from box 1.
A design studio invoiced £6,000 plus £1,200 VAT, due on 31 January. Nothing has been paid by 31 July, and the debt is written off:
| Account | Debit | Credit |
|---|---|---|
| Bad debts expense | £6,000 | |
| Input VAT (bad debt relief) | £1,200 | |
| Trade debtors | £7,200 |
The £1,200 is included in box 4 of the return covering 31 July or later.
Part payments
If the customer paid something, allocate it to the invoices in date order (oldest first) unless the payment clearly relates to a specific supply. Relief is only due on the VAT fraction of the unpaid part.
If the customer pays later
Any payment received after relief has been claimed must be accounted for: repay the VAT fraction of the receipt as output tax in box 1 of the return for the period in which it is received. Debt collection agencies’ recoveries count too.
The records HMRC expects
Keep for each claim:
- copies of the VAT invoices;
- the dates of supply and payment due, and the date the debt was written off;
- the amount of VAT claimed and the return it was claimed on;
- any payments received and how they were allocated;
- a refunds for bad debts account summarising the claims.
The relief has no form of its own; the records are the claim, which is why HMRC asks for them in a check.
Customers who claim relief on unpaid purchases
The rule cuts both ways: a business that has reclaimed input VAT on a purchase it has not paid for six months must repay that input VAT. Old unpaid supplier invoices in the purchase ledger need reviewing for this reason.
The accounting side of writing off debts is covered in bad debts in the chart of accounts; HMRC’s conditions are set out in VAT Notice 700/18.