VAT bad debt relief: wait six months, claim within 4 years and 6 months, worked for a £7,200 invoice part-paid

A client invoiced a customer in March and the customer has gone quiet. The client has already put the VAT on that invoice through a return and paid it to HMRC, so they are out of pocket for the net sum and the tax. The question the practice gets is when the VAT can come back, and by when it must be claimed. This guide sets out the two dates, the part-payment rule and the claim itself.

What GOV.UK says

I read the HMRC notice on bad debt relief on GOV.UK today. The points that matter:

• The wait. You must wait "at least 6 months from the later of" the date payment was due and the date of supply before claiming.
• The limit. For supplies after 30 April 1997, "you must claim within 4 years and 6 months of the later of" those two dates.
• The conditions. The VAT must already be accounted for and paid to HMRC. The debt must be written off in the client's day-to-day VAT accounts and moved to a separate bad debt account. The value of the supply must not exceed the customary selling price, and the debt must not have been paid, sold or factored under a valid legal assignment.
• The claim. It goes on the VAT Return for the period in which the conditions are first met. It cannot go on an earlier period's return. The amount is included in box 4.

The dates on one invoice

The later date is what counts. If the invoice was raised on 1 March with terms of 30 days, payment was due on 31 March and the six months run from 31 March, not from the supply date. A practice that counts from the invoice date will claim too early.

Part payments

GOV.UK says payments go to the earliest supply first, unless the customer names a particular supply and pays it in full. Relief covers only the unpaid portion: "you can only claim a refund on the VAT relating to the amount that is still unpaid."

Our arithmetic. Say the customer paid £2,400 against this invoice. The unpaid gross is £4,800. At a 20% rate, VAT is one sixth of a gross figure, so the VAT in the unpaid part is £4,800 divided by 6, which is £800. The box 4 claim is £800. With nothing paid it would be £1,200.

What to keep

Keep copies of the VAT invoices, or an equivalent document, and a separate bad debt account showing the amount written off, the VAT claimed, the customer's name and the invoice date and number. GOV.UK gives the retention as 4 years from the date of the claim, which is separate from the usual six-year period.

A short check per client

1. Which return paid the VAT on the invoice? Relief needs it paid to HMRC.
2. What was the later of the due date and the supply date?
3. Is it at least six months on, and under 4 years and 6 months?
4. Has anything been paid, and which supply did the customer name?
5. Is the debt written off in the client's accounts and in the bad debt account?

For the penalty side of a client's VAT, see which penalty applies to a late return or payment. For a client near the registration line, see VAT registration at £90,000 and, on the way out, cancelling VAT registration.

I did not read the rules for retail schemes, for a debt that is later paid after relief was claimed, or for clients on the Flat Rate Scheme, so check the full notice for those.

Overlyft builds AI staff who join your practice team and list each client's sales invoices still unpaid, work out the six-month and 4 years and 6 months dates from the later of due date and supply date, and put the claims that are due in front of you before the return is filed.

This is general information, not tax advice. Check GOV.UK and the client's own figures before you advise.