Short answer: Under the VAT Cash Accounting Scheme you pay VAT on a sale only when the customer pays you, so an unpaid invoice normally has no output VAT to recover. Under standard accounting you pay the VAT when you invoice, and VAT bad debt relief is how you claim it back once the debt is at least 6 months overdue and written off. Neither route gets the invoice itself paid.
If a commercial customer will not pay, the VAT on that invoice is a second problem on top of the missing cash. How big a problem depends on how your business accounts for VAT. This guide compares the VAT Cash Accounting Scheme with VAT bad debt relief under standard accounting, and explains where chasing the debt fits alongside both.
This guide is not tax advice. Figures and rules were checked against GOV.UK on 20 October 2026. Primary reading: GOV.UK VAT Cash Accounting Scheme and HMRC Notice 700/18: relief from VAT on bad debts. Talk to your accountant before you change scheme or make a claim.
Quick comparison
| Cash Accounting Scheme | Standard accounting + bad debt relief | |
|---|---|---|
| When output VAT is due on a sale | When your customer pays you | On the VAT Return for the period of the invoice / supply |
| Unpaid invoice | No VAT paid to HMRC yet on that sale | VAT already paid; reclaim through bad debt relief |
| Waiting period | None | At least 6 months from the later of the due date and the supply date |
| Admin | Track receipts and payments | Write off in VAT accounts, keep a bad debt account, claim in box 4 |
| Who can use it | Estimated VAT taxable turnover £1.35m or less to join; leave above £1.6m | Any VAT-registered business that meets the Notice 700/18 conditions |
| Does it collect the debt? | No | No |
How the Cash Accounting Scheme treats unpaid invoices
GOV.UK explains that with cash accounting you pay VAT on your sales when your customers pay you and reclaim VAT on your purchases when you have paid your supplier. Normally you report and pay VAT on invoices whether or not they have been paid.
For a business with slow-paying B2B customers, that is the main appeal: if a customer sits on a £12,000 invoice (£10,000 plus £2,000 VAT), the £2,000 is not due to HMRC until the money arrives. You are not funding the VAT out of your own cash while you chase.
The trade-off is on purchases. You can only reclaim input VAT once you have paid your own suppliers, so if you buy on long credit terms you wait longer for that VAT back.
Who can use cash accounting
According to the GOV.UK eligibility page, you can use it if you are VAT-registered and your estimated VAT taxable turnover is £1.35 million or less in the next 12 months. You must leave once VAT taxable turnover is more than £1.6 million. You cannot use it alongside the VAT Flat Rate Scheme (which has its own cash-based turnover method), if you are not up to date with VAT Returns or payments, or if you have committed a VAT offence in the last 12 months.
Some transactions must stay on standard accounting even inside the scheme, including VAT invoices with payment terms of 6 months or more and invoices raised in advance. If you agree very long terms with a commercial customer, check those invoices separately.
Leaving the scheme with debts still unpaid
This is the point where cash accounting and bad debts meet. GOV.UK says that when you leave you must report and pay HMRC any outstanding VAT, whether your customers have paid you or not. You can usually spread that over 6 months, but if your VAT taxable turnover exceeded £1.35 million in the last 3 months you must pay straight away, and you must pay immediately if HMRC has withdrawn your use of the scheme.
So a ledger full of old unpaid invoices can produce a VAT bill on exit. Ask your accountant how those debts should then be treated, including whether bad debt relief may later apply to them under Notice 700/18.
How VAT bad debt relief works under standard accounting
On standard (invoice) accounting you have usually paid the output VAT to HMRC already. Notice 700/18 lets you claim it back if the customer never pays, provided the conditions are met. The headline ones are:
- The debt has been unpaid for at least 6 months from the later of the date payment was due and payable and the date of supply. Your normal credit terms, or any longer terms you agreed, set the due date.
- You have written off the debt in your day-to-day VAT accounts and transferred it to a separate bad debt account.
- You claim within 4 years and 6 months of the later of the due date and the supply date.
- You claim by including the VAT in box 4 of the VAT Return for the period when you meet the conditions, and keep the records the Notice lists.
Part payments reduce the claim: you can only claim the VAT on the amount still unpaid. If the customer pays after you have claimed, you must repay the VAT element of that payment through box 1. Writing a debt off for VAT does not stop you chasing it. For the full walkthrough see our guide to VAT bad debt relief on unpaid commercial invoices.
The rule also runs the other way. If you have not paid a supplier within 6 months of the relevant date, Notice 700/18 says you must repay the input VAT you reclaimed on that purchase.
Which approach suits a business with slow B2B payers?
There is no universal answer, and the choice is one for you and your accountant. In general terms:
- Cash accounting tends to suit smaller VAT-registered businesses that invoice other companies on credit terms, see late payment regularly, and do not want to pay VAT before the cash arrives.
- Standard accounting may suit businesses that mostly get paid quickly, pay suppliers on long terms, or are above the £1.35 million entry threshold. Bad debt relief then covers the occasional customer who never pays, but only after the 6-month wait.
Either way, the VAT treatment only limits the damage. The £10,000 net in the example above is still missing until the debtor pays.
Where chasing the debt fits in
VAT schemes decide when HMRC gets its share. They do nothing to recover the invoice. For an overdue commercial debt the practical steps are the same under either scheme:
- Check the invoice is undisputed and that you hold the contract, purchase order and delivery evidence (see proof of debt).
- Add statutory interest and fixed compensation where the Late Payment of Commercial Debts (Interest) Act 1998 applies.
- Send a final demand and, if needed, a letter before action.
- If it still does not clear, instruct a collection partner rather than letting the file age. Older debts are usually harder to recover; see aged debt over 90 days.
On standard accounting, diary the 6-month bad debt relief date separately from the collection timeline. Waiting for the relief date is not a reason to stop chasing, and starting collection does not stop you claiming relief once the conditions are met.
Frequently asked questions
Can I claim VAT bad debt relief if I use cash accounting? Normally there is nothing to claim on an unpaid sale, because under cash accounting you only pay the VAT when the customer pays you. Invoices that sit outside the scheme (for example payment terms of 6 months or more) and debts outstanding when you leave the scheme can be different. Check with your accountant.
What is the turnover limit for the Cash Accounting Scheme? GOV.UK says you can join if your estimated VAT taxable turnover is £1.35 million or less in the next 12 months, and you must leave if it goes above £1.6 million.
How long do I wait before claiming bad debt relief? At least 6 months from the later of the date payment was due and the date of supply, and you must claim within 4 years and 6 months of that date (Notice 700/18).
Do I have to tell HMRC I use cash accounting? No. GOV.UK says you do not have to tell HMRC you use it, and you join at the start of a VAT accounting period.
What happens if the customer pays after I claimed bad debt relief? You repay the VAT element of what you receive, in box 1 of the VAT Return for the period you were paid.
Does writing off a debt for VAT mean I give up on collecting it? No. The write-off is an accounting step for the relief. You can still chase or instruct a partner to recover the debt.
Does Debt Collection UK give VAT advice? No. We introduce unpaid B2B invoices to independent partner agencies that carry out recovery. We are not accountants, solicitors or FCA-authorised. Take VAT advice from your accountant.
What does instructing through this site cost? The fee is 15% of what is recovered, payable only when you have been paid. Recovery is not guaranteed.
Whichever VAT scheme you use, the invoice still needs paying. If a Ltd, LLP or PLC customer has stopped responding, upload the invoice via unpaid invoices or read how business debt collection works. The fee is 15% of what is recovered, payable only when you have been paid. Recovery is not guaranteed.