Taxation (UK) · The computation of VAT liabilities

VAT Bad Debt Relief and Other VAT Adjustments

Updated 11 October 2026 · Fact-checked

Bad debt relief lets you reclaim output VAT you paid to HMRC on a sale the customer has not paid. The debt must be at least six months overdue and written off in your accounts. Pre-registration input tax adds recoverable VAT on goods still held and recent services. You claim both on your VAT return.

Understand Bad Debt Relief and Other VAT Adjustments

VAT is normally accounted for on the tax point, not when cash arrives. So if you invoice a customer, pay the output VAT to HMRC, and the customer never pays, you have funded the VAT out of your own pocket. Bad debt relief fixes this. You claim the VAT back as if it were input tax.

The relief has conditions. The VAT must already have been accounted for and paid to HMRC. The debt must be written off in your accounts. Six months must have passed from the later of the date of supply and the date payment was due. The claim must be made within four years and six months of that same date. The price must not exceed the normal selling price. If the customer later pays, you must repay the VAT to HMRC.

A trader using the cash accounting scheme never pays VAT on an unpaid sale, so it does not need bad debt relief. The relief matters for businesses on the normal basis.

A second adjustment is pre-registration input tax. Before you register, you cannot charge VAT or reclaim it. Once registered, you may recover VAT on some earlier purchases. Goods bought within four years before registration count if you still hold them (or hold them as part of other goods) at registration. Services count if bought within six months before registration. Both must relate to the business and be supported by valid VAT invoices.

The third area is the VAT-exempt portion. If you make both taxable and exempt supplies, you are partially exempt. Input tax linked to taxable supplies is recoverable. Input tax linked to exempt supplies is not, unless the de minimis limits are met. Input tax on overheads is apportioned between the two.

Key rules to remember

VAT in a VAT-inclusive amount: VAT = gross amount × 20/120 (standard rate 20%); Use this when the unpaid debt is stated including VAT. The standard rate of 20% is given in the tax rates and allowances.
Bad debt relief conditions: VAT paid to HMRC + debt written off + at least 6 months after the later of supply date and due date + claim within 4 years 6 months of that date; All conditions must be met. Claim on a VAT return as input tax.
Part-paid debt: Relief = unpaid gross amount × 20/120; Only the unpaid part of the debt qualifies. Do not use the full invoice VAT.
Pre-registration input tax: goods: Goods bought within 4 years before registration and still held at registration; Goods already sold or used up before registration do not qualify.
Pre-registration input tax: services: Services bought within 6 months before registration; Both goods and services must relate to the business and be supported by valid VAT invoices.
Partial exemption de minimis test: Total input tax ≤ £625 per month on average AND exempt input tax ≤ 50% of total input tax; If both tests are met, all input tax is recoverable. If either fails, only the taxable part is recovered.

How to solve Bad Debt Relief and Other VAT Adjustments questions

Use this method for any bad debt relief or VAT adjustment question. Work through the conditions one at a time and state each one.

1Identify the adjustment: bad debt relief, pre-registration input tax or partial exemption.
2For bad debt relief, find the later of the date of supply and the date payment was due. Add six months. Check the debt is at least six months overdue at the claim date.
3Check the other conditions: output VAT already paid to HMRC, debt written off in the accounts, price not above the normal price, and the claim is within four years and six months.
4Work out the VAT on the unpaid amount only. If the amount is gross, multiply by 20/120. If it is net, multiply by 20%.
5For pre-registration input tax, test each purchase. Goods must be within four years and still held. Services must be within six months. Ignore anything already sold or consumed.
6For partial exemption, split input tax into taxable, exempt and residual. Apply the de minimis tests first. Then apportion any residual input tax.
7Show where the figure goes: bad debt relief and pre-registration input tax are added to input tax on the VAT return. Any later payment from the customer is repaid as output tax.
8State your conclusion in a short sentence, with the figure.

Quickest way: Six-month and four-year checklist

When to use it: Use this in Section A and Section B objective questions, where you must pick the correct claim amount or say whether relief is available.

Write the due date. Add six months. Is the claim date after it? If not, the answer is no relief.
Look for write-off in the accounts. No write-off means no relief.
Take only the unpaid part of the debt. Multiply the gross figure by 20/120.
For pre-registration claims, cross out services older than six months and goods already sold or older than four years.
Add the remaining VAT. That is the claim.

Common mistakes in Bad Debt Relief and Other VAT Adjustments

Counting six months from the invoice date instead of the due date.
Students assume the invoice date is the start. The rule uses the later of the supply date and the date payment was due.
Fix: Find the due date first. If credit terms give 30 days, start from the end of those 30 days.
Claiming the VAT on the whole invoice when the customer has part-paid.
The question gives the invoice total and students use it without checking payments.
Fix: Deduct amounts already received. Apply 20/120 to the unpaid gross balance only.
Claiming relief without a write-off in the accounts.
Students focus on the six-month test and forget the accounting entry.
Fix: Check the facts for the words written off. If the debt is only doubtful, there is no claim.
Treating bad debt relief as a reduction of output tax.
It feels like cancelling the sale.
Fix: Show it as input tax on the VAT return. Any later receipt is repaid to HMRC as output tax.
Reclaiming VAT on all pre-registration purchases.
Students forget the limits for goods and for services.
Fix: Goods: bought within four years and still held. Services: bought within six months. Check each item separately.
Applying 20% to a VAT-inclusive figure.
Rushing under time pressure.
Fix: If the amount includes VAT, multiply by 20/120. Only multiply by 20% for a net figure.

Worked examples

Example 1

Delta Ltd is VAT registered and uses the normal VAT accounting basis. It sold goods on credit for £12,000 plus VAT, invoiced at £14,400. Payment was due on 28 February 2026. The customer paid £4,800 in March 2026 and nothing more. Delta wrote off the balance in its accounts on 30 September 2026, and the VAT on the sale was paid to HMRC. Calculate the bad debt relief and say when it can be claimed.

Show the solution

Six months after the due date of 28 February 2026 is 28 August 2026. The write-off on 30 September 2026 is after this, so the six-month test is met.
Output VAT was paid to HMRC and the debt is written off, so the other conditions are met. The claim is also well within four years and six months.
Unpaid gross balance = £14,400 − £4,800 = £9,600.
VAT relief = £9,600 × 20/120 = £1,600.
Delta claims £1,600 as input tax on the VAT return that includes the claim date, which is the return covering 30 September 2026 or later.

Answer: Bad debt relief of £1,600 is available, claimed as input tax on the VAT return for the period in which the conditions are met. If the customer later pays, Delta must repay the VAT.

Example 2

Priya starts trading and registers for VAT on 1 January 2027. Before registration she bought: equipment on 1 March 2025 with VAT of £1,200, still used in the business; inventory on 1 November 2026 with VAT of £600, all unsold; services on 1 August 2026 with VAT of £300; services on 1 May 2026 with VAT of £160; and inventory with VAT of £400 that was all sold before registration. All were bought for the business and have valid VAT invoices. Calculate the pre-registration input tax she can recover.

Show the solution

Equipment: bought 22 months before registration, within four years, and still held. VAT of £1,200 is recoverable.
Inventory bought 1 November 2026: within four years and still held. VAT of £600 is recoverable.
Services bought 1 August 2026: five months before registration, within six months. VAT of £300 is recoverable.
Services bought 1 May 2026: eight months before registration, outside six months. VAT of £160 is not recoverable.
Inventory sold before registration is not held at registration. VAT of £400 is not recoverable.
Total = £1,200 + £600 + £300 = £2,100.

Answer: Priya can recover £2,100 of pre-registration input tax on her first VAT return.

Exam tips

In objective questions, check the dates first. A claim date inside the six-month period is the usual trap.
Always start from the later of the supply date and the due date, not the invoice date.
Remember the figures you are given: standard rate 20%. Use 20/120 when the amount includes VAT.
In written answers, list each condition for bad debt relief and say whether it is met. Markers award a mark for each one.
For pre-registration input tax, set out each purchase in a short list with a tick or cross and a reason.

Practice questions from The computation of VAT liabilities

Bad Debt Relief and Other VAT Adjustments in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA FoundationBad Debts and Bad Debts Recovered

Bad Debt Relief and Other VAT Adjustments: frequently asked questions

What are the conditions for VAT bad debt relief?

The VAT must have been paid to HMRC, and the debt must be written off in your accounts. Six months must have passed since the later of the date of supply and the date payment was due. The claim must be made within four years and six months of that date.

Can I claim bad debt relief if the customer has paid part of the debt?

Yes, but only on the unpaid part. Take the unpaid gross balance and multiply by 20/120. The paid part has already been covered by the customer.

Can I reclaim VAT on purchases made before I registered?

Yes, in some cases. Goods bought within four years before registration can be recovered if you still hold them at registration. Services bought within six months before registration can also be recovered. You need valid VAT invoices and the purchase must relate to the business.

What happens if the customer pays after I have claimed relief?

You must repay the VAT to HMRC. You do this by adding it to output tax on the VAT return for the period in which you receive the payment.