Glossary · Accounting
VAT bad debt relief
VAT bad debt relief lets a business reclaim the VAT it paid on an invoice the customer never paid. In the UK, the debt must be over six months old.
When you charge VAT on an invoice, you usually pay that VAT to the tax authority whether or not the customer pays you. Bad debt relief gives it back if the invoice goes unpaid.
In the UK, you can claim when the debt is more than six months old (counted from the later of the due date and the date of supply), you have accounted for and paid the VAT, and you have written the debt off in your VAT account. Claims must be made within four years and six months.
EU countries have their own versions, under Article 90 of the VAT Directive, with different conditions — some require the customer’s insolvency or court action first.
Example
A UK supplier invoiced £12,000 plus £2,400 VAT, due on 15 January, and paid the VAT to HMRC. By 16 July the invoice is over six months overdue; the supplier writes it off and reclaims the £2,400 on its next VAT return.