VAT Bad Debt Relief: Reclaiming VAT on Unpaid Invoices 2026/27

The problem bad debt relief solves

Under standard VAT accounting you owe HMRC the output VAT on a sale as soon as you raise the invoice, whether or not the customer pays. The VAT rate is 20% standard for most supplies. If the customer then never pays, you are out of pocket not just for your goods or services but for the VAT you already handed over. Bad debt relief lets you claim that VAT back.

The conditions

To claim VAT bad debt relief you generally need all of these:

• You accounted for the VAT on the supply and paid it to HMRC.
• The debt is at least six months overdue, measured from the later of the due date and the supply date.
• You have written the debt off in your business accounts.
• You have not sold or assigned the debt to a third party.
• The claim is made within four years and six months of the relief becoming due.

A worked example

You invoice a client GBP 5,000 plus VAT at 20%, so GBP 6,000 in total, with payment due 30 June 2026.

• You include the GBP 1,000 of output VAT on your VAT return and pay it to HMRC.
• The client never pays. Six months after the due date, on 31 December 2026, the debt qualifies if you have written it off.
• On your next VAT return you reclaim the GBP 1,000 as input VAT via bad debt relief.

You are still out the GBP 5,000 of value, but at least you are not subsidising HMRC for VAT you never collected.

How to claim

• Reclaim the VAT as input tax in box 4 of the relevant VAT return.
• Keep a separate bad debt account or records showing the supply, the VAT, the write-off and the six-month point.
• Do not net it off against new sales; treat it as a specific reclaim.
• If the customer later pays, repay the VAT for the amount received.

Cash accounting sidesteps it

If you are on the VAT Cash Accounting Scheme you do not need bad debt relief at all. Under that scheme you only account for output VAT when the customer actually pays. A customer who never pays simply means you never owed the VAT, so there is nothing to claim back. For businesses with frequent late payers, that automatic protection is one of the scheme's main attractions.

The bottom line

For 2026/27, VAT bad debt relief lets a registered business reclaim output VAT, for example GBP 1,000 on a GBP 5,000 net sale, once the invoice is six months overdue and written off. Businesses on cash accounting get the same protection automatically.

Track your VAT position with the calchub.uk VAT calculator, and confirm the bad debt relief conditions and time limits on gov.uk before making a claim.