Glossary · UK
What is VAT Bad Debt Relief?
A mechanism that allows VAT-registered businesses to reclaim output VAT already paid on invoices that have remained unpaid by the customer for more than six months.
Full Definition
VAT Bad Debt Relief (BDR) allows VAT-registered businesses to reclaim output VAT they have already accounted for and paid to HMRC on sales invoices where the customer has not paid. Under the standard VAT accounting method (invoice accounting), businesses must account for output VAT at the point of issuing an invoice -- before the cash is received. If the customer then fails to pay, the business has effectively paid VAT on income it never received. BDR allows the business to recover this VAT by making an adjustment on a later VAT return, subject to conditions: the debt must be at least six months old (measured from the date of supply or the due date for payment if later), the VAT must have been paid to HMRC, the debt must not have been sold or factored, and the business must have written off the debt in its accounts. The BDR claim is made on the VAT return for the period in which the conditions are met. The business must keep records of the claim for four years. Correspondingly, if a VAT-registered customer does not pay an invoice and the supplier claims BDR, the customer must repay the input VAT they originally reclaimed, once the debt is six months old. Cash accounting for VAT -- an option for businesses with turnover under £1.35 million -- avoids BDR issues entirely, as VAT is only accounted for when cash is received.