VAT – bad debt relief

What Is VAT Bad Debt Relief?

Normally, you must pay HMRC the VAT you charge on sales — even if you have not been paid by your customer. However, if a debt becomes bad (i.e., it is unlikely to be paid), you may be entitled to reclaim the VAT you have already accounted for.

Bad debt relief effectively adjusts your VAT liability to reflect the fact that the underlying sale will not be paid.

When Can You Claim?

You can claim VAT bad debt relief when:

• You have included the VAT on a sale in a VAT return

• The customer has not paid within six months of the date of the invoice

• The debt has become irrecoverable

The right to relief arises at the point the debt becomes bad — typically after those six months has passed with no payment.

Key Conditions for Relief

To successfully claim bad debt relief, you must ensure that:

• VAT was correctly charged and accounted for in your VAT return

• You have written evidence of attempts to collect payment

• The debt is not simply outstanding but is considered irrecoverable

HMRC requires businesses to demonstrate that reasonable steps were taken to collect the debt before relief can be granted.

Examples of Acceptable Evidence

Supporting evidence might include:

• Copies of the original invoice

• Statements of account sent to the customer

• Follow-up letters or emails chasing payment

• Records of phone calls or attempts to contact the debtor

• Correspondence where the customer admits inability to pay

Good record-keeping is essential to supporting your claim.

How Relief Is Calculated

The amount of VAT you can reclaim is generally the VAT element of the bad debt included in your VAT return. In simple terms:

VAT eligible for relief = VAT on the unpaid invoice

You adjust your VAT returns to account for the reclaimed amount, reducing your overall VAT liability.

Timing of the Claim

A claim for bad debt relief should usually be made in the VAT return period in which the debt became bad (after the six-month waiting period). If you miss this period, you may still be able to claim in a later return, but timing and documentation become more complex.

Common Pitfalls

Be aware of these common issues that can invalidate a claim:

• Claiming before the six-month period has elapsed

• Lack of evidence showing reasonable collection attempts

• Trying to claim for debts that are not genuinely irrecoverable

• Failing to adjust VAT accounted for in previous periods

Professional advice ensures your claim is valid and compliant.

How Applegrow Can Help

Bad debt relief can result in a valuable VAT refund or reduced liability, but only if the rules are followed carefully.

Applegrow can assist you with:

• Determining whether a debt qualifies for relief

• Reviewing your records and supporting evidence

• Advising on correct VAT return adjustments

• Ensuring claims meet HMRC requirements

If your business is struggling with unrecovered customer debts and you want to explore whether VAT bad debt relief applies, Applegrow can provide clear, practical guidance.