The Ledger Entry After the Write-Off: Claiming VAT Bad-Debt Relief Without a Second Clean-Up

A sales invoice that never clears is a cash problem first and a VAT problem second. The supplier has already accounted for output tax on the sale, yet the customer has not paid. VAT bad-debt relief exists to correct that mismatch, but it is not a matter of simply writing off the debt in the ledger and moving on. The claim has a timetable, an evidence file and a repayment trigger if the customer later pays.

For an owner-manager, the practical aim is straightforward: recover the VAT already paid over to HMRC without creating a second trail of corrections. That requires treating bad-debt relief as a routine part of credit control rather than a year-end rescue.

The Relief Is Not Automatic

Bad-debt relief is available to a VAT-registered business that has supplied goods or services, has accounted for VAT on that supply, has not been paid, and has written off the debt in its day-to-day accounts. All four conditions matter. A debt that is merely overdue is not enough. A debt that has been provided for in the accounts but not written off is also not enough.

The position is different for businesses using VAT Cash Accounting. Under that scheme, VAT is accounted for when payment is received, so there is no output tax to recover on an unpaid invoice. The same logic can apply in part to other special schemes, so the starting point is always the VAT accounting method actually used.

Start With the Due Date, Not the Invoice Date

The six-month clock runs from the date payment was due, not the date the invoice was issued. If an invoice dated 3 March 2026 has payment terms of 30 days, the due date is 2 April 2026 and the earliest claim date is 2 October 2026. The claim is then made in the VAT return period that covers that date, subject to the normal return deadlines.

This distinction catches businesses that use long payment terms. A 90-day invoice issued in January will not reach the six-month point until July at the earliest. The claim date should be diarised from the due date, with the invoice number and customer name recorded at the same time.

Where a customer has become insolvent, the timing rules can differ and the evidence requirements are more specific. In those cases, the insolvency documentation should be checked against HMRC guidance before the claim is entered.

Build the Evidence File Before the Claim

HMRC does not require a separate application form for bad-debt relief, but it does expect the claim to be supported. A review will usually ask for evidence that the supply took place, that VAT was charged, that payment was due, that the debt remained outstanding and that it was written off.

A practical file contains:

• a copy of the sales invoice and any credit note;
• the order, delivery note or other evidence that the goods or services were supplied;
• the agreed payment terms and due date;
• the customer ledger or statement showing the outstanding balance;
• reminders, statements and collection correspondence;
• evidence of the write-off in the accounting records;
• insolvency or administration documents, where relevant.

The weakest claims are often those where the invoice exists but the write-off cannot be traced. A journal entry labelled bad debt is useful; a journal entry that identifies the customer, invoice and VAT element is better. The record should allow someone else to reconstruct the claim without asking the person who made it.

Partial Payments and the Apportionment Trap

Relief is claimed only on the VAT element of the amount still unpaid. If a customer has paid part of an invoice, the claim must be reduced accordingly. Suppose an invoice is £1,200 including VAT, made up of £1,000 net and £200 VAT. If the customer pays £600 and nothing more, the outstanding balance is £600. The VAT fraction of that balance is £100, so the claim is £100, not £200.

Where a customer owes several invoices and makes a payment without specifying which one it relates to, the allocation should follow the business's normal accounting policy and be applied consistently. Allocating payments to the oldest invoice is common, but the important point is that the allocation is recorded and can be explained. A claim that mixes paid and unpaid invoices without a clear schedule is difficult to defend.

Putting the Claim Through the Return

For an accrual-based VAT accounting business, bad-debt relief is normally claimed by including the amount in Box 4 of the VAT return as input tax. It is not usually made by reducing Box 1 output tax. The return entry should be supported by a schedule showing each invoice, the VAT claimed and the period in which the claim arises.

If the business uses partial exemption, the treatment of the recovered VAT should be checked against the partial exemption method. The same applies where the invoice relates to a supply that was treated as outside the scope or exempt. Bad-debt relief follows the original VAT treatment, so a claim cannot be used to recover VAT that was never charged.

The Repayment Trigger

If the customer pays after relief has been claimed, the recovered VAT must be brought back into account. The repayment is normally made by including the amount as output tax in the VAT return for the period in which payment is received. The same principle applies if the debt is later assigned, if goods are repossessed, or if a credit note is issued that changes the original supply.

This is why the bad-debt relief schedule should remain live after the claim. A closed file invites a missed repayment. A simple register showing invoice number, claim period and any later recovery is enough to prevent the error.

The Four-Year Window and the Review File

A claim must be made within four years of the date on which it arises. Records supporting the claim should be kept for at least four years after the claim, and longer if the business has other reasons to retain the underlying accounting records.

A one-page schedule works well for review purposes: invoice number, customer, invoice date, due date, VAT charged, payments received, outstanding balance, VAT claimed, claim date, VAT return period and any later repayment. The schedule should sit alongside the invoice copies and write-off evidence, not in a separate folder that nobody opens.

A Monthly Routine Beats a Year-End Rescue

Bad-debt relief is most manageable when it is tied to the aged debtor review. Once a month, the owner or finance lead can identify invoices that have passed the six-month point, confirm that the debt has been written off, calculate the VAT element and add the claim to the next return. That routine keeps the cash recovery moving and prevents a backlog of old invoices from turning into a rushed claim at the end of the VAT year.

The invoice may never land in the bank account, but the VAT does not have to disappear with it. A dated claim, a clean evidence file and a live register are usually enough to recover the tax without creating a second administrative mess.