Skip to main content
Five pound note

How do bad debts affect my VAT Return?

What happens if you pay VAT to HMRC but never receive the VAT back from your client? You may be able to reclaim the VAT. Here’s how.

What is a bad debt?

A bad debt is an amount which is owed by a customer to the business that is unlikely ever to be paid.

Tax doesn't need to be taxing

We'll email you expert tips to help you manage your business finances. You can unsubscribe at any time.

Can I reclaim VAT on bad debts?

VAT on bad debts can be reclaimed once the debt is over six months old (from the date the payment was due) and is less than four years and six months old.

In order to reclaim you must have:

  • Paid the VAT over to HMRC, and
  • Written off the debt in your accounts.

Bad debts may or may not affect your VAT return depending on what type of VAT scheme  you use.

Many small businesses operate the cash accounting scheme and under this scheme there is no adjustment for bad debts, as the VAT has not been paid over to HM Revenue and Customs (HMRC) in the first place.


How do I reclaim VAT on bad debts?

This is an extract of the boxes from the VAT return that you will be asked to complete when you submit your VAT return online:

Box to be completed Example of extract from tax return Comments
Box 1 – This shows the total output VAT for a three month period. The amount which is to be reclaimed will have been included here in a previous return. The bad debt claim is not included in this box.  VAT due in this period on sales and other outputs (Box 1): £2,860.73 In this example the total output VAT for the period is £2,860.73.
Box 4 – This is the amount of VAT reclaimed from purchases and other expenses (input VAT). If a bad debt claim is being made include it in this box.  VAT reclaimed in this period on purchases and other inputs (including acquisitions from the EC) (Box 4): £1,567.31 In the example shown the total input VAT claimed on purchases and other expenses is £1,442.59 and a bad debt claim of £124.72* has been made. The two amounts are added together and included in this box. *This is the VAT element of a total bad debt of £748.32 (£623.60 net + £124.72 VAT).


Quiz: Do you understand VAT and bad debts?

The amount of VAT due to be paid to HMRC for a three month period is £1,246.57. However, a claim has yet to be made for a bad debt (over six months), the amount is £114.00 (including VAT) and it has been written off in the accounts. The revised amount payable to HMRC is:

What happens if the customer pays the outstanding debt?

If you have made a claim and you subsequently receive the payment at a later date, you must refund the amount to HMRC via your VAT return.

Checklist: What records do I have to keep?

When you reclaim the VAT on a bad debt the following records must be kept for four years from the date of the claim. Login to save this checklist to your profile for future use – as you work through the list, any checkboxes that are ticked or unticked will be automatically saved to your profile. (To register to join and enjoy the benefits of membership click on the link at the top right of the page. It will only take a few minutes to create your profile).

You must be logged in to use this checklist

Login or Register

End of Article
Share this content

Brought to you by:

Tide Business

Tide is a business account and app designed to save small businesses time and money. Manage your cards from within the app, set-and-forget your auto-categories, integrate with your accountancy software, then get back to doing what you love – growing your business.

View partner's profile

Register with Informi today:

  • Join over 20,000 like-minded business professionals
  • Create your own personalised account with curated reading lists and checklists
  • Access exclusive resources including business plans, templates, and tax calculators
  • Receive the latest business advice and insights from Informi
  • Join in the discussion through the comments section


I’ve been working through the how to start a business in 20 days ebook and so many of the things I’d done are now nicely tied together and some gaps now filled. I love the simplicity. Thank you.

Sarah Gosling – Gosling Charity Consulting

I love receiving my Informi emails. They’re always well written and engaging.

Jennifer Hobson – JEH Bookkeeping