How does VAT bad debt relief work when a customer doesn't pay?

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**What is VAT bad debt relief?** When a VAT-registered business raises an invoice and accounts for the VAT output tax but the customer never pays, the business effectively has to fund the VAT itself. VAT bad debt relief (under VATA 1994 s. 36) allows recovery of the VAT already paid to HMRC once the debt meets the qualifying conditions. **Qualifying conditions** To claim bad debt relief, all of the following must be true: - The VAT was accounted for to HMRC on the return for the period in which the supply was made - The debt is more than **6 months old** (measured from the later of the due date or the date of supply) - The debt has been written off in your VAT accounts as a bad debt - The amount is not covered by credit insurance or a guarantee - The business has not sold the debt to a third party (factoring) **How to claim** Claim is made on the VAT return for the period in which the conditions are met. Box 4 (VAT reclaimed on purchases) includes the bad debt relief amount. Keep records of the original invoice, the dates, and when the debt was written off. **Example: James, management consultant** James raised an invoice for £12,000 + VAT = £14,400 (VAT: £2,400) in August 2025. He paid the £2,400 VAT to HMRC on his September 2025 return. The customer still hasn't paid by March 2026 (6 months past the August due date). James writes off the debt and claims £2,400 bad debt relief on his March 2026 VAT return. **What if the customer later pays?** If the customer pays after you have claimed bad debt relief, you must repay the VAT to HMRC. Include it as output tax on the next return covering the date of payment. **Cash accounting scheme** Businesses on the VAT cash accounting scheme only account for VAT when payment is received — so bad debt relief does not arise (if you haven't been paid, you haven't accounted for the VAT yet).

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