VAT Bad Debt Relief

Why bad debt relief exists

Under the usual accrual rules, output VAT becomes due at the tax point, when the goods or services are supplied. Your return for that period includes the VAT on every invoice you issued, paid or not. If the customer pays late, you have funded the VAT for a while. If the customer never pays, you have paid tax on money you never received.

Relief corrects that, but only for debts that are genuinely bad. A payment that is merely late does not qualify, and the rules are built to tell the two apart: in the UK by a fixed waiting period, in other countries by a requirement that the debt has actually been written off.

Businesses on a cash basis do not need it. HMRC’s notice says that under cash accounting “you’re only paying VAT on the amounts you have actually received from customers, so bad debt relief is unnecessary.”

The UK conditions

Section 2.2 of Notice 700/18 lists the conditions that apply to current sales. In HMRC’s words: “You must already have accounted for the VAT on the supplies and paid it to HMRC.” “You must have written off the debt in your day to day VAT accounts and transferred it to a separate bad debt account.” “The value of the supply must not be more than the customary selling price.” The debt must not have been “paid, sold or factored under a valid legal assignment.” And it must have “remained unpaid for a period of 6 months after the later of the time payment was due and payable and the date of the supply.”

The due date comes from your normal credit terms or any longer period you agree with the customer, so extending a customer’s terms also pushes back the date you can claim. HMRC adds that you “cannot claim on a return for an accounting period earlier than the one in which you become entitled to the relief.”

The claim has a deadline too. For supplies made after 30 April 1997, you must claim “within 4 years and 6 months of the later of” the due date and the date of supply.

Claiming, part payments and later payments

The relief goes on the VAT return as if it were input tax. HMRC says to include the amount “in box 4 of your VAT Return which covers the date when you fulfil the conditions to make a claim.” You do not change box 1 or reissue the original invoice.

Part payments shrink the claim: “you can only claim a refund on the VAT relating to the amount that is still unpaid.” Payments are allocated to the earliest supply unless the customer says which one it is paying and pays that one in full. On a 1,200 GBP invoice at 20 percent where the customer paid 300 GBP, 900 GBP is unpaid and the relief is one-sixth of it, 150 GBP.

If money arrives after you have claimed, some of the relief goes back. HMRC’s formula is the amount of the claim, times the payment received, divided by the amount outstanding when you claimed. In the example, a later payment of 450 GBP means repaying 150 × 450 ÷ 900 = 75 GBP, entered “in box 1 of your VAT Return for the period in which you received the payment.”

HMRC also expects records: copies of the VAT invoices, and a bad debt account showing for each debt the amount written off, the VAT claimed, the period it was claimed in, the period the VAT was originally accounted for, payments received, the customer’s name, and the invoice date and number. Those records must be kept for 4 years from the date of the claim, and HMRC says that does not alter the standard six-year rule for VAT records.

Bad debt relief is not a credit note

A credit note reduces the value of a sale, which reduces output VAT directly. HMRC is explicit that non-payment is not a reason to issue one: “You may not issue a credit note simply because your customer has not paid you for your supply. You may only issue a credit note where there is a genuine mistake or overcharge or an agreed reduction in the value of your supply.” Ireland’s Revenue manual says the same thing from the other side: “the question of issuing a credit note does not arise in the case of a bad debt written off.”

The distinction matters because the two routes have different timing. A valid credit note reduces output VAT under the credit note rules, covered in our output VAT entry. Bad debt relief waits for the conditions above and is claimed as a separate line on a later return.

The customer side mirrors it. A UK business that has not paid a supplier within 6 months of the relevant date must repay the input tax it claimed on that purchase, without waiting to be told: HMRC says suppliers “will not be required to issue a notification.”

How Stripe’s statuses differ from relief

Stripe records tax when an invoice finalizes, before payment, and its tax reports say a failed or canceled payment “doesn’t decrease the total tax reported.” To bring the figure down, Stripe tells you to “void the invoice, mark it as uncollectible, or create a credit note.” Each of those decreases the reported tax on the day you do it.

That timing is Stripe’s reporting convention, not a VAT rule. Stripe describes an uncollectible invoice as one where “the customer is unlikely to pay,” adding that “Normally, you treat it as bad debt in your accounting process.” Marking it is a reasonable step in your own records. But if you file a UK return straight from Stripe’s tax total after marking an invoice uncollectible in its first month, the return will already be lower by that invoice’s VAT, months before the six-month condition is met. The same goes for voiding an unpaid invoice: Stripe treats a void invoice as zero-value for reporting and says to check local rules on whether an invoice can be canceled or whether a credit note is needed instead.

If the customer then pays an uncollectible invoice, Stripe lists that transition as one that increases the reported tax again. Under the UK rules, that payment is where box 1 comes in.

The practical result is a list to keep at each filing: unpaid invoices whose tax Stripe has already removed from its reports, and the date each one becomes eligible for relief.

Other countries do it differently

Ireland is a useful contrast because its rules have no fixed waiting period. Revenue’s manual says “The expiry of the supplier’s trade credit period is not, on its own, sufficient to trigger an entitlement to bad debt relief,” and that relief is “available only for bad debts actually written off,” not for provisions for doubtful debts. The claim goes on the return for the period the debt is written off, by increasing the VAT on purchases figure in Box T2, and a later recovery reduces that figure in the period the payment arrives.

Other countries set their own waits and conditions, and Article 90 lets EU member states limit relief for non-payment altogether. Before relying on Stripe’s reports for a country, check that country’s own bad debt rules and when they let you reduce the tax.

Bad debt relief in your QuickBooks books

Two separate entries are involved, and they happen at different times. Writing off the debt removes the receivable: the net amount goes to bad debt expense and the customer’s balance is cleared. That is the accounting write-off, and it can happen whenever you decide the money is not coming.

The VAT relief comes later. Until you claim it, the VAT on the unpaid invoice is still part of the output VAT you owe, so it stays in your VAT liability account. On the return where you claim relief, the VAT liability goes down by the amount claimed. If you post the relief at the same moment as the write-off, your liability account will disagree with your return for six months. Keeping the two entries apart, with the claim period noted on the bad debt account, makes each return reconcile to the books.