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 6 months after the due date. Eligibility: invoice over 6 months old past due date, debt has been written off in your accounts, you've not assigned the debt to a third party (so debt sale disqualifies but spot factoring on a recourse basis usually doesn't), and the customer is not connected to your business. Claim by adjusting box 4 of your VAT return upward by the VAT element of the unpaid invoice. If the customer later pays in part or full, you must repay the corresponding VAT to HMRC. Available on standard accounting and (with different timing) cash accounting schemes.

Last updated: 8 May 2026.

HMRC bad debt relief lets you reclaim the VAT you've already paid on an unpaid B2B invoice 6 months after the due date. More detail + scope

Summary

HMRC bad debt relief lets you reclaim the VAT you've already paid on an unpaid B2B invoice 6 months after the due date. Eligibility: invoice over 6 months old past due date, debt has been written off in your accounts, you've not assigned the debt to a third party (so debt sale disqualifies but spot factoring on a recourse basis usually doesn't), and the customer is not connected to your business.

Claim by adjusting box 4 of your VAT return upward by the VAT element of the unpaid invoice. If the customer later pays in part or full, you must repay the corresponding VAT to HMRC. Available on standard accounting and (with different timing) cash accounting schemes.

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

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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.

Last reviewed: 30 July 2026

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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?

All five conditions must be met: (1) the invoice must be more than 6 months past its due date (not invoice date), (2) you've written the debt off in your accounts as bad, (3) the goods or services were supplied for consideration in the UK, (4) you haven't assigned the debt to a third party (debt sale to Lowell or Cabot disqualifies you; spot factoring with recourse usually doesn't), (5) the customer is not 'connected' to your business under HMRC's definition.

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 original payment due date.

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

You must repay the corresponding VAT to HMRC by adjusting box 4 of your next VAT return downward, on a pound-for-pound basis. 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. With recourse factoring (the factor demands cash back if the customer doesn't pay) you remain on the hook for the debt and can still claim bad debt relief 6 months after due date if the customer hasn't paid. With non-recourse factoring (the factor absorbs the loss) the debt has effectively been sold and you cannot claim bad debt relief. 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 , bad debt relief doesn't apply. Cash accounting is automatic for businesses under £1.35m turnover (£1.6m exit threshold).