The Six-Month Rule for Unpaid Invoices: VAT Bad Debt Relief in 2026

An unpaid invoice affects more than cash flow. For a VAT-registered business, it can also mean VAT has already been accounted for and paid to HMRC on a sale that has not produced any money. VAT bad debt relief exists to correct that position, but it is not automatic and it is not the same as writing a debt off in the accounts.

Writing Off Versus Reclaiming VAT

Writing off a debt in the accounts is an accounting decision. Claiming VAT bad debt relief is a separate VAT treatment with its own conditions. A business can write off a debt and still fail to make a valid VAT claim if the timing is wrong, the records are incomplete or the debt has already been adjusted by credit note. The two processes should be linked in practice, but they should not be treated as interchangeable.

Bad debt relief allows the supplier to reclaim output VAT that has been accounted for on an unpaid supply. It does not recover the net sale value, and it does not replace normal debt collection. It is a VAT correction, not a payment from HMRC for the whole invoice.

First, Confirm the Debt Qualifies

Before calculating anything, the business should confirm that the basic conditions are met. The supply must have been made, the invoice must have been issued, and output tax must have been accounted for on the VAT return. Payment must not have been received. The debt must also have been written off in the business records.

The six-month rule then becomes the central test. Relief is not available immediately after an invoice becomes overdue. Generally, a claim can be made once six months have passed from the due date for payment, provided the other conditions are satisfied. The claim is then made in the VAT return period in which that six-month point is reached.

This distinction matters because the invoice date and the due date are not always the same. If payment is due on receipt, the two dates may align. If the terms allow 30 days, the six-month clock starts later. Businesses should work from the contractual due date, not simply the date printed at the top of the invoice.

The Six-Month Clock in Practice

A common error is to claim in the return period covering the invoice date. That can be too early. Another error is to wait until the accounting year-end before reviewing old debts, which may delay a valid claim by several months. A better approach is a monthly or quarterly review of aged debtors, with the due date recorded against each invoice.

The date on which the debt is written off should also be documented. If the write-off happens after the six-month point, the claim is generally made in the return period covering the write-off and the satisfaction of the conditions. The sequence should be clear in the bad debt relief records so that an HMRC officer can follow it without reconstruction.

Partial Payments and the VAT Fraction

Bad debt relief is only available on the unpaid amount. If a customer has paid part of an invoice, the claim must be restricted to the outstanding balance. The VAT element should be calculated on that balance using the appropriate VAT fraction.

For example, if an invoice for £1,200 including VAT at 20% has been paid to the extent of £600, the outstanding amount is £600. The VAT within that outstanding amount is £100, not £200. Claiming relief on the full invoice VAT after a partial payment is a common and avoidable error.

Where a customer makes several payments across several invoices, the allocation should be recorded. If the payment does not identify which invoice it relates to, the business should apply a reasonable and consistent allocation method and keep a note of it. The aim is to show clearly which invoices remain unpaid and what VAT has been claimed on each.

Credit Notes Are Not a Substitute

A credit note reduces the amount owed and adjusts output VAT when it is correctly issued. If a credit note has already been issued for the debt, bad debt relief should not also be claimed for the same VAT. Doing both would overcorrect the VAT position.

In some cases, a credit note may be the simpler commercial solution, particularly where the customer accepts that the invoice was wrong or the supply was cancelled. In other cases, the debt is genuinely unpaid and bad debt relief is the appropriate route. The important point is to choose one treatment and record the reasoning. A credit note and a bad debt relief claim should not sit side by side for the same supply.

Records HMRC Expects

HMRC expects a bad debt relief account to be kept. This should record the invoice number, customer name, invoice date, due date, VAT amount, amount outstanding, date the debt was written off, VAT reclaimed and any later payment received. The account does not need to be elaborate, but it should be complete enough to support each claim.

Supporting evidence is equally important. A business should be able to show the invoice, evidence that the supply was made, the payment terms, the debtor record, reminders or statements sent, and the accounting entry that wrote the debt off. Correspondence showing that payment was pursued is useful, although the absence of a formal legal claim does not by itself disqualify the relief. The overall picture should be consistent.

VAT records should generally be retained for six years. The bad debt relief account should be kept alongside the VAT return and invoice records so that the claim can be traced without relying on memory.

Claiming and Reversing the Relief

Bad debt relief is normally claimed by including the reclaimed VAT in Box 4 of the VAT return. It should not be treated as an adjustment to Box 1. The bad debt relief account should be updated at the same time so that the return and the supporting schedule agree.

If the customer later pays some or all of the debt, the relief must be reversed. The business should account for output tax on the amount recovered in the return period in which payment is received. If the recovery is partial, only the relevant proportion of the relief is reversed. This follow-up step is easy to overlook when a former customer makes a late payment months after the claim.

Businesses using VAT Cash Accounting generally do not need bad debt relief in the same way, because output tax is accounted for when payment is received rather than when the invoice is issued. A business that has left the scheme, or is unsure which treatment applies to a particular period, should check the position before making a claim.

Common Traps That Delay Valid Claims

Claims are often delayed by basic record failures rather than by disagreements over the law. Missing due dates make the six-month point difficult to prove. Claims made before the six-month period has expired are premature. Partial payments that are not allocated leave the VAT calculation uncertain. Debts that have already been credited are sometimes claimed twice. Late recoveries are not always reversed.

A practical sequence helps. Review aged debtors, identify debts older than six months from the due date, confirm that each has been written off, calculate VAT only on the unpaid balance, open or update the bad debt relief account, include the correct amount in Box 4 and monitor the debt for later payment. Used consistently, that routine separates the accounting write-off from the VAT claim and gives a valid claim a clear evidential trail.