VAT bad debt relief on unpaid commercial invoices

VAT bad debt relief is an HMRC mechanism that can let a VAT-registered business reclaim output VAT it has already accounted for and paid on a supply that remains unpaid — when the conditions in VAT Notice 700/18 are met. It is a tax adjustment. It does not collect the invoice, create a court judgment, or replace credit control.

This guide is not tax advice. Confirm entitlement, timing and records with your accountant or HMRC using the Notice and the VAT bad debt relief manuals. Rules and forms change; always check the live GOV.UK pages.

Debt Collection UK (a trading style of PASECOM GROUP LTD) introduces B2B files to independent partner agencies. We are not solicitors, we are not authorised by the Financial Conduct Authority, and we do not collect consumer credit. PASECOM GROUP LTD was incorporated on 7 April 2026. We introduce commercial claims; we do not issue proceedings. Partners collect. Recovery is not guaranteed. Debtor must be a Ltd, LLP or PLC. Creditor may be a sole trader.

For the cash chase itself, see unpaid invoices and business debt collection. Related hub reading: aged debt over 90 days and late payment compensation.

What VAT bad debt relief is — and what it is not

If you supplied on or after 1 April 1989, accounted for and paid the VAT, but remain unpaid, you may claim relief on the VAT element once Notice conditions are met. Sources: Notice 700/18, VBDR1500, VBDR1600, VBDR3100.

Relief recovers (subject to conditions) the VAT you already paid over, not the net invoice, statutory interest, or Late Payment Act compensation — see GOV.UK late commercial payments and the Late Payment of Commercial Debts (Interest) Act 1998.

Under the Cash Accounting Scheme, you generally only account for VAT on amounts received, so bad debt relief is usually unnecessary — see the Notice.

Core conditions (verify on GOV.UK)

HMRC’s Notice and VBDR1500 require, in outline, that:

1. The supply was made on or after 1 April 1989.
2. You have already accounted for and paid the VAT on the supply to HMRC.
3. You have written off the debt in your day-to-day VAT accounts and transferred it to a separate bad debt account (refunds for bad debt account), with the records the Notice lists.
4. The value of the supply is not more than the customary / open market selling price.
5. The debt has not been paid, sold or factored under an absolute assignment (factoring with no reassignment can block relief while assigned — see Notice paragraph 3.12).
6. The debt has remained unpaid for six months after the later of the date payment was due and payable and the date of supply.

Do not invent extra thresholds — check Notice 700/18 for your facts, including any older transitional rules.

When you can claim and the time limit

Wait at least six months from the later of the due date and the supply date, then claim on the VAT return for the period in which you first meet the conditions — not an earlier period.

For supplies after 30 April 1997, claim within four years and six months of the later of the due date and the date of supply (VBDR1600; Notice 2.3). Miss that window and relief may be lost.

How to claim on the VAT return

When entitled, put the VAT in box 4 of the VAT return for the period in which the conditions are met (Notice 700/18 §2.4; VBDR3100). Keep the invoice copies and separate bad debt account entries the Notice requires.

VAT returns guidance covers filing mechanics. After deregistration, Form VAT427 may apply — confirm on GOV.UK (VBDR3100).

Part payments and later recovery

If the customer has paid part of the invoice, you can only claim relief on the VAT relating to the unpaid portion, using the attribution rules in the Notice. If you claimed relief and the customer (or a guarantor) later pays, you must repay the VAT element of that payment to HMRC — typically by putting it in box 1 of the return for the period you received the money (Notice section 3.14).

Recovering cash after a claim creates a VAT repay duty — plan for that with your accountant; a bad debt claim does not close the commercial file.

Relief does not replace chasing the debt

Claiming box 4 relief does not stop you seeking payment of the net and VAT-inclusive balance. Keep a proportionate credit-control trail:

1. Confirm proof of debt and the correct Ltd / LLP / PLC entity.
2. Assert Late Payment Act interest and fixed compensation where the contract qualifies.
3. Send a Practice Direction letter before action for company-versus-company files (typically about 14 days to reply) — see letter before action for business debts and Practice Direction – Pre-Action Conduct.
4. If still unpaid and undisputed, instruct a partner via business debt collection or decide whether to issue a court claim yourself.

The fee is 15% of what is recovered, payable only when you have been paid. Marketing on this site describes 15% only when the client is paid. The fee is 15% of what is recovered, payable only when you have been paid. Recovery is not guaranteed.

A calm sequence when an invoice is unpaid and VAT is at stake

1. Confirm you accounted for and paid output VAT on the supply (or take advice if you use cash accounting).
2. Diary the six-month point from the later of due date and supply date; assemble the bad debt account records the Notice requires.
3. In parallel, chase the commercial debt — reminders, Late Payment Act figures, then a Practice Direction LBA.
4. When conditions are met, claim in box 4 on the correct return within the 4-years-6-months limit.
5. If the debtor later pays, repay the VAT element of that payment to HMRC and update the bad debt account.
6. If the Ltd / LLP / PLC still will not pay the invoice, instruct a partner on fixed-percentage terms or decide on court — VAT relief alone does not clear cash.

Frequently asked questions

Does VAT bad debt relief collect my unpaid invoice? No. It can reclaim output VAT already accounted for when HMRC conditions are met. The net debt (and any Late Payment Act interest or compensation) still needs chasing, a letter before action, partner instruction, or a court claim.

How long must a commercial invoice be unpaid before I can claim? Under Notice 700/18, wait at least six months from the later of the payment due date and the date of supply. Then claim on the return for the period when you meet all conditions.

Where do I put the claim on my VAT return? In box 4 of the VAT return for the period in which entitlement arises, and keep the separate bad debt account records listed in the Notice.

What if the customer pays after I claimed relief? Repay the VAT element of the later payment to HMRC (typically box 1 for that period) and record it in the bad debt account. See Notice section 3.14.

Is this tax advice? No. This is a commercial credit-control overview pointing at primary GOV.UK sources. Ask your accountant or HMRC before you claim.

What does instructing through Debt Collection UK cost? The fee is 15% of what is recovered, payable only when you have been paid. Recovery is not guaranteed.

When an unpaid commercial invoice is draining cash, reclaiming eligible VAT is useful — but it is not payment of the invoice. Upload the file via unpaid invoices if you want a partner to chase the Ltd, LLP or PLC debtor. The fee is 15% of what is recovered, payable only when you have been paid. Recovery is not guaranteed.