Writing off a debt is an accounting and tax decision, not an admission of defeat. Once an invoice has been unpaid for six months you can usually reclaim the VAT you've already paid to HMRC on it, and the write-off itself is generally deductible for tax where the debt is genuinely bad. Both of those need the debt written off in your records first, and that's the step businesses tend to skip.
The short version
- VAT bad debt relief needs the debt to be six months overdue and written off in a separate bad debt account, under VAT Notice 700/18.
- You claim it in box 4 of your VAT return, and the deadline is four years and six months.
- Your customer has a mirror obligation: they must repay input tax on an invoice still unpaid six months after the relevant date.
- A bad or doubtful debt is generally deductible, but a general percentage reserve is not, per HMRC's BIM42701.
- If the debt is later paid, the VAT goes back in box 1 and the recovery is taxable in the year received.
When to stop chasing
There's no rule that fixes the moment, but three things tend to mark it.
- Your customer can't pay. An insolvency notice, a dissolved company, or a documented inability to pay changes the question from how to collect to how to close it off.
- Chasing costs you more than the debt. A claim on the small claims track costs £35 to £455 in court fees and generally cannot recover your legal costs, so a small debt against a defendant who'll contest it is often not worth issuing.
- The relationship is over and your file is complete. Where you've sent the pre-action letter, given the response period and had nothing back, your choice is between issuing a claim and closing the debt.
The six-month VAT point is a useful anchor here, because it's the earliest date at which writing off gives you something tangible. Treat it as the earliest sensible date for the accounting decision, not as a deadline for the chasing one.
Reclaiming the VAT
If you've accounted for VAT on an invoice your customer never paid, you can reclaim it. Notice 700/18 sets out conditions, and these are the ones that bite in practice:
- You have already accounted for the VAT and paid it to HMRC.
- You have written the debt off in your day to day VAT accounts and transferred it to a separate bad debt account. The transfer is a record-keeping step, but it's a genuine condition and not a formality.
- The debt has remained unpaid for six months after the later of the date payment was due and payable and the date of the supply.
- The value of the supply was not more than the customary selling price.
- The debt has not been paid, sold or factored under a valid legal assignment.
On timing, the notice is precise in both directions: you must wait at least six months from the later of when payment was due and payable and the date of supply, and for supplies made after 30 April 1997 you must claim within four years and six months of the same later date.
The claim itself is simple. You include the VAT you're claiming in box 4 of the VAT return covering the date you meet the conditions.
Two things are worth noticing. The six months runs from the later of the due date and the supply date, so a long payment term pushes your date out. And if you factor the debt you're outside the relief, because the condition is that the debt has not been sold or factored under a valid legal assignment.
What the customer has to do
This rarely comes up in credit control conversations. Notice 700/18 puts an obligation on the customer, not just the supplier:
"For all later supplies you're required to repay input tax if you do not pay for the supplies within 6 months of the relevant date."
The relevant date is the date of supply, or the due date for payment if later. The notice also makes clear that you don't have to notify them: "Your suppliers will not be required to issue a notification so you will need to monitor the time you take to pay your suppliers." The customer repays by making a negative entry that reduces the input tax in box 4.
So an invoice sitting unpaid at six months has a consequence for your customer regardless of what you do about it. If you mention it in a late-stage conversation you're stating a fact, not making a threat, and it's often news to the person you're speaking to.
If they later pay, they can reclaim the input tax in proportion to the payment, in the period the payment is made.
The tax deduction
For income tax, HMRC's Business Income Manual sets out what is allowed:
"A deduction is not allowed for a debt owed to a trader except: a bad debt; a doubtful debt to the extent estimated to be bad... a debt or part of a debt released by the creditor wholly and exclusively for the purposes of the trade as part of a statutory insolvency arrangement."
The deduction belongs in the year the debt becomes bad or doubtful, not the year you get round to tidying the ledger. And there's a clear limit on the shortcut version:
"A general reserve, for example, one calculated as a percentage of total debts or of total sales, should not be admitted as a deduction if made without regard to the circumstances of the particular debtors."
For companies, trade debts are dealt with under the loan relationship rules instead of under this manual page, so ask your accountant how that applies to you.
HMRC also expects you to evidence the judgement. BIM42715 asks how the doubtfulness was evaluated, when, by whom, and on what information, and refers to correspondence with the debtor, solicitors, banks and factoring agencies. Your chasing record is that evidence, and it's a practical reason to keep it.
If they pay after you have written it off
Both sides of the write-off reverse.
For VAT, the notice is direct: "If you have claimed a refund under this scheme and you later receive a payment for the supplies, you must repay to us the VAT element included in the payment." The repayment goes in box 1 of the return for the period you received the payment, and you have to show all payments in the bad debt account. Where the payment is partial, the notice gives a formula: the amount of the claim, multiplied by the payment received, divided by the consideration outstanding when the claim was made.
For tax, a recovered debt is brought back in. BIM42730 states that where a deduction has been made and the debt is later recovered, "the amount recovered or the excess should be brought into credit in the year of recovery".
One useful detail: if you were insured for the VAT-inclusive amount and the insurer pays out, you keep your entitlement to bad debt relief.
Records to keep
The separate bad debt account has prescribed content, and here's what goes in it: the amount written off, the VAT being claimed, the VAT period of the claim, the total VAT charged on each supply, the period you originally accounted for it, payments received, the customer's name, and the date and number of the invoice.
On retention, the notice says to keep those records "for 4 years from the date you make your claim", and notes that this sits alongside the standard requirement to keep VAT records for six years. For a limited company, GOV.UK separately requires company records including "debts the company owes or is owed" to be kept for six years from the end of the financial year they relate to.
What the numbers say about how often this happens
Write-offs feel more common than they are. Of the invoices raised on Adfin in the seven months to 31 January 2026 with a direct debit mandate already in place, 97.0% were paid and 1.3% were still unresolved six months later; where there was no mandate, 90.3% were paid and 5.4% were still open (Adfin platform data, more than 150,000 requests created in that window). Most debts that look lost at 60 days are late rather than bad.
So the argument is for a defined process rather than an early write-off. The businesses that lose money on this are usually the ones without a step after the last reminder, so the invoice quietly stops being anybody's job. A write-off you decide on a date, with the VAT reclaimed and the deduction taken, leaves you better off than a debt that simply ages.
Common questions
When can you write off an unpaid invoice? There is no fixed date, but six months after the payment was due is the earliest date at which the write-off gives you something back, because that is when you can reclaim the VAT under VAT Notice 700/18.
How do you claim VAT bad debt relief? Write the debt off in your VAT accounts and transfer it to a separate bad debt account, wait until it is six months overdue, then include the VAT in box 4 of your next return. The deadline is four years and six months from the later of the due date and the supply date.
Does my customer have to repay the VAT they claimed? Yes. HMRC requires the customer to repay input tax where they have not paid for the supply within six months of the relevant date, and suppliers are not required to notify them.
Is a written-off invoice tax deductible? A bad debt, or a doubtful debt to the extent estimated to be bad, is generally deductible in the year it becomes bad or doubtful. A general percentage reserve across all debtors is not.
What happens if the customer pays after the write-off? You repay the VAT element in box 1 of the return for the period you received the payment, and the recovery is brought into credit for tax in the year of recovery.
How long do I keep the records? Four years from the date of the VAT claim for the bad debt records, alongside the standard six-year VAT record-keeping requirement.
Sources
- HMRC — VAT Notice 700/18, relief from VAT on bad debts (accurate as of August 2026)
- HMRC — Business Income Manual BIM42701 (accurate as of August 2026)
This article explains how bad debt write-offs and VAT bad debt relief work and is not tax or legal advice. VAT and tax treatment depends on your circumstances, so check with your accountant before making a claim. Last updated August 2026.
