HMRC Bad Debt VAT Relief on Unpaid Invoices UK 2026

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HMRC bad debt relief lets you reclaim the VAT you've already paid on an unpaid B2B invoice once it has been unpaid for 6 months after the later of the due date and the date of supply. Eligibility: you have accounted for and paid the VAT, the debt has been written off in your accounts, the price was not above your customary selling price, and the debt has not been paid, sold or factored under a valid legal assignment. Claim in box 4 of your VAT return, within 4 years and 6 months. If the customer later pays in part or full, you repay the corresponding VAT in box 1. Cash accounting users cannot claim, because they only pay VAT on money received (VAT Notice 700/18).

What this page covers

This page covers

HMRC bad debt VAT relief UK: eligibility, claim process, repayment if customer later pays, cash accounting vs standard scheme

Not covered here

General invoice finance education (see /guides/), individual provider reviews (see /providers/), full pricing breakdown (see /guides/costs/)

AP

Adam Parker

Founder & Managing Director, Muswell Rose, founder and PSC of Best Business Loans Ltd

Adam is the founder and managing director of Muswell Rose and a founder of Best Business Loans Ltd, the company behind Market Invoice. He spent over three years as managing director of Penny, a UK invoice finance business, and his career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library.

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HMRC Bad Debt VAT Relief UK FAQ

What is HMRC bad debt VAT relief?

A right to reclaim the VAT element of an unpaid B2B invoice from HMRC, 6 months after the invoice due date. Without bad debt relief, you'd have paid VAT to HMRC on a sale you never received money for. Bad debt relief lets you recover the VAT portion as a refund or set-off against your next VAT return.

When can I claim bad debt VAT relief?

Under VAT Notice 700/18 the main conditions are: (1) you have already accounted for the VAT and paid it to HMRC, (2) you've written the debt off in your accounts and moved it to a separate bad debt account, (3) the value of the supply was not more than your customary selling price, (4) the debt has not been paid, sold or factored under a valid legal assignment (a debt sale disqualifies you; if the invoice was factored, check with your factor and accountant), (5) the debt has been unpaid for 6 months after the later of the payment due date and the date of supply.

How do I claim bad debt VAT relief?

Adjust box 4 (VAT reclaimed on purchases and other inputs) of your next VAT return upward by the VAT element of the unpaid invoice. Keep evidence in your VAT records: the original invoice, a record of why it's bad, evidence of write-off in your accounts, and any chasing correspondence. Don't notify HMRC separately. Claim must be made within 4 years and 6 months of the later of the payment due date and the date of supply.

What if my customer pays after I've claimed bad debt relief?

You must repay the corresponding VAT to HMRC by putting the amount in box 1 of your VAT return for the period in which you received the payment. If they pay 50% of the original debt, you repay 50% of the VAT relief claimed. Track partial recoveries carefully.

Does spot factoring an invoice disqualify me from bad debt relief?

Depends on the structure. HMRC's rule is that a debt paid, sold or factored under a valid legal assignment does not qualify. With non-recourse factoring the debt has effectively been sold and you cannot claim. With recourse factoring, whether you can claim depends on whether the debt has been assigned back to you when the factor recourses it. Confirm with your factor and accountant before claiming.

Bad debt relief on cash accounting vs standard VAT scheme?

On the standard VAT scheme, you pay VAT to HMRC when you raise the invoice, regardless of whether the customer pays. Bad debt relief lets you recover that VAT 6 months after the due date. On cash accounting, you only pay VAT to HMRC when the customer pays you.

So if a customer never pays, you never had to remit the VAT in the first place, and bad debt relief doesn't apply. Cash accounting is optional: you can choose to use it if your VAT taxable turnover is £1.35m or less, and must leave once it exceeds £1.6m (GOV.UK).