VAT bad-debt relief — HMRC's 6-month rule

The £8,000 he didn't know he could have back

A small-business owner — a one-man IT consultancy with about 40 customers — had been quietly absorbing the 20% VAT cost on every doubtful debt for years. Customer doesn't pay a £6,000 invoice? He'd raise a £6,000 bad-debt expense and move on. The £1,000 of VAT he'd originally paid to HMRC on that invoice? Gone. Cost of doing business.

Except it wasn't. HMRC publishes a relief — VAT Notice 700/18 — specifically to handle this. If a customer hasn't paid you six months after the invoice's due date, and you've written the debt off in your books, you can reclaim the VAT element you originally accounted for. The relief is automatic in the sense that it's available to anyone on standard accruals VAT — you just have to claim it.

He'd never claimed it. Not because he was disorganised but because nobody had explained it to him. He'd assumed bad-debt VAT was the same as bad-debt revenue: lost, written off, gone. When we walked his aged-debtors list together at year-end, we found 18 invoices that qualified. The relief came to £8,000. Eight thousand pounds reclaimed in one VAT return, just by knowing the rule existed.

The mechanics of this chapter are about making sure that doesn't happen to you.

What HMRC actually says

VAT Notice 700/18 (titled "Relief from VAT on bad debts") sets out the four conditions for a bad-debt VAT relief claim. In plain English:

1. The invoice is at least six months overdue. Specifically, six months past the due date on the invoice, not the issue date. A 30-day-terms invoice issued 1 January is due 31 January. The relief eligibility starts on 31 July.
2. The debt has been written off in your books. "Written off" here means recognised as a bad debt in your records — a specific provision counts, a full write-off counts.
3. The original supply was on the standard VAT accruals basis. If you were on cash accounting (which delays your VAT until the customer pays) you never accounted for the VAT in the first place, so there's nothing to claim back. If you were on flat-rate, you're excluded entirely (more on that below).
4. The relief is claimed within 4 years and 6 months of the supply date. If you forgot to claim relief on a 2020 invoice, you've probably still got time. After 4 years 6 months, HMRC bars the claim — it's gone.

Tick all four boxes, and the VAT element of the invoice becomes recoverable as a Box 4 adjustment on your next VAT return. Box 4 is "VAT reclaimed on purchases" — the bad-debt relief sits alongside your normal input VAT for the period.

Key point: The six months is counted from due date, not issue date. Get this wrong and you'll claim too early. HMRC's online VAT system will accept the figure — they don't validate per-invoice — but if you're ever audited, an early claim is an under-declaration, and that triggers penalties.

How Blankitt automates this

The good news is you don't have to track this manually. When you post a specific bad-debt provision (Chapter 2), the engine immediately checks all four eligibility conditions. If they pass, the engine inserts a row in the fin_vat_bad_debt_claims table with status pending.

That pending row sits there until the next VAT return calculation runs. When you open the return for the period in which the claim becomes claimable, the engine pulls all pending claims into the Box 4 figure automatically. The return preview itemises them — you'll see "VAT bad-debt relief: 3 claims, £1,840.00" as a line in the breakdown, with a click-through to the individual claims. Sense-check, then file. On successful HMRC submission, the claims flip from pending to claimed, stamped with the return ID.

That's the happy path. The engine handles the eligibility check, the timing, the inclusion in the return, the post-submission status update — all automatic. Your job is to (a) raise the specific provisions as you normally would, and (b) eyeball the relief claims on the return preview to make sure nothing looks off.

If the customer later pays

The symmetric case is mandatory under 700/18, and people miss it more often than the relief itself. If you've claimed VAT relief on a written-off debt, and the customer later actually pays you, you must repay the VAT relief on your next return.

This is sensible — the relief is for debts you didn't recover. If you recover the debt, you didn't suffer the VAT loss, so HMRC gets their VAT back. It's a Box 1 adjustment (an output-VAT increase) on the next return.

Blankitt handles this automatically too. When you click Recover on a specific provision that previously triggered a relief claim, the engine raises a sibling negative-amount claim row in fin_vat_bad_debt_claims. That row gets pulled into Box 1 on the next return — your VAT bill goes up by the relief you previously reclaimed. The engine then marks both rows as a matched pair so the audit trail is clean.

Key point: You cannot disable the repayment claim. The relief is conditional on the debt being uncollected — recovering the debt invalidates that condition. Trying to suppress the repayment would be VAT fraud, which is one of the bad reasons to spend a year in prison. Don't.

The "pending" state — why it exists

When you raise a specific provision today and the underlying invoice is not yet 6 months past due, the eligibility check fails. The engine doesn't insert a claim row at that point. But the engine doesn't forget either — at the start of each VAT return period, it re-evaluates all specific provisions where no claim exists yet. If any have crossed the 6-month threshold since the last return, they get a pending row inserted retrospectively.

This matters at year-end because some of the doubtful debts you provision will be 4 or 5 months overdue at year-end. They're not eligible for relief yet — but they will be by next quarter, and the engine will pick them up automatically on the next return.

So when you finish the bad-debt review in Chapter 2, you should expect to see some provisions trigger immediate relief (the ones already 6+ months overdue at provisioning time) and some that don't (the ones 4–5 months overdue, where you've provisioned early but the VAT relief is queued for later).

The VAT scheme caveats

The relief mechanics depend on which VAT scheme you're on:

• Standard accruals. The default. Relief applies in full. The engine handles it.
• Cash accounting. You only account for VAT when the customer pays you. So if they don't pay, you never accounted for the VAT in the first place — there's no relief to claim because there's no loss to relieve. The engine recognises a cash-accounting scheme and skips the claim entirely.
• Flat-rate scheme. Excluded by HMRC. Your VAT output is a fixed flat-rate percentage of your turnover, regardless of actual input VAT or bad debts. Box 4 on a flat-rate return is essentially zero (you don't reclaim input VAT either). Notice 700/18 explicitly carves out flat-rate traders. The engine skips the claim — if you're flat-rate, the relief mechanism doesn't apply to you.
• Annual accounting. Eligible — you pay VAT quarterly or monthly on account and reconcile annually, but the underlying mechanism is accruals. Relief works the same way.

If you're not sure which scheme you're on, check Settings → VAT settings — the scheme field shows it. If you've switched schemes during the year, talk to your accountant before raising provisions on legacy invoices, because the relief math at the boundary gets nuanced (you might have invoices that originated under cash but are being provisioned under accruals).

How the journals flow

This is the bit that confuses bookkeepers most. The VAT bad-debt relief is not a separate journal. There is no general-ledger movement.

When you raise the specific provision in Chapter 2, the journal is:

DR  6800  Bad Debt Expense            £6,000
CR  1190  Allowance for Doubtful Debts    £6,000

That £6,000 is the gross outstanding — the full invoice amount, VAT included. The Bad Debt Expense captures the full economic loss including the VAT you'd paid to HMRC. There's no need to split the VAT element out into a separate account.

The relief itself is purely a VAT return adjustment. It increases your Box 4 figure on the next return, which reduces the VAT you owe HMRC for that period (or increases the refund you're due). The bank-side cash effect — receiving less from HMRC, or paying them less — flows through to your VAT control account when you reconcile the next return.

Same for the repayment when a customer pays after the claim: no GL journal at the relief-reversal moment; the Box 1 adjustment on the next return increases what you pay HMRC; the cash effect lands when you settle the return.

This is why people miss it: there's no double-entry footprint at the moment of claiming. The "claim" is a metadata record in fin_vat_bad_debt_claims that the return calculator consumes. Your trial balance doesn't change at claim-creation time. Don't try to back-calculate a separate VAT element into a separate GL account — you'll double-count.

Reviewing pending claims

Open Reports → VAT Bad-Debt Claims. The page shows three sections:

• Pending — claims raised but not yet included in a return. Each row shows the original invoice, the VAT element being claimed, and the eligibility date (when the 6-month rule passes).
• Claimed — claims that have been included in a submitted return, with the return ID.
• Repaid — claims that were later reversed because the customer paid, with the matched pair.

Before you file your year-end VAT return (Chapter 6), open this report and eyeball the Pending list. Anything in there will flow through Box 4 on the next return. The total at the bottom of the Pending section is what your reclaim figure will be.

If anything looks wrong — a claim you don't recognise, a customer you didn't think you'd provisioned — click through to the underlying provision and check. Better to catch it now than to file an over-claim.

Edge cases worth flagging

• Partial provisions, partial relief. If you provisioned £3,000 out of a £6,000 invoice, you reclaim VAT proportionally — half the VAT element. The engine handles the proration automatically.
• Zero-rated supplies. No VAT was ever charged, so no relief is possible. The engine recognises this and doesn't raise a claim.
• Exempt supplies. Same as zero-rated — no claim.
• Invoices over 4 years 6 months old. HMRC bar the relief. The engine skips them and logs a reason in the claims report.
• Provision reversed before 6 months. If you raised a provision early and then reversed it (because the customer paid before 6 months), no claim was ever filed and no repayment is needed. The provision lifecycle ends cleanly.

Tips

• Don't try to file the claim manually. The engine handles it. Adding a manual Box 4 entry for the same relief leads to double-claiming, which HMRC will spot on any reconciliation and flag as an under-declaration.
• Don't reverse a provision just because 6 months passes. Reverse only when the debt is recovered. Reversing prematurely triggers the auto-repayment of relief you haven't actually got back yet — you'll pay HMRC for the relief and not collect from the customer. Worst of both worlds.
• Run the claims report before filing. Five minutes spent reviewing the pending claims is cheaper than a £200 penalty for an over-claim.
• Keep evidence for 4 years. HMRC can ask for proof of any claim within 4 years. The evidence chain is automatic — the specific provision, the bad-debt reason, the original invoice — but make sure the provision reasons are decent enough to stand on their own (see Chapter 2's tips).

Up next

Chapter 4 is the Fixed Asset Register sign-off. Depreciation policies, the year's charge, additions and disposals during the year. Less drama than bad-debt review, but the journals are larger and the audit attention is higher. We'll walk through the register, post the depreciation charge, and confirm the policies are sane.