VAT bad debt relief was first introduced on 1 October 1978. From its inception, up until 1 April 1989 businesses could only claim relief if their customer had been declared formally insolvent. This is no longer the case and for supplies made from 1 April 1989 businesses can claim relief after the debt has remained unpaid for six months from the appropriate date, providing all the other conditions for the relief are met. The old scheme was withdrawn by virtue of Section 39(5) of the Finance Act 1997.
Bad debt relief allows a business to claim a refund of the output tax they have paid to HMRC when they do not receive payment from their customers. A refund can only be claimed when all the conditions have been met and must be repaid if the claimant subsequently receives payment from their customer. The relief is two-sided, in that the recipient of the supplies which have not been paid for is required to repay input tax claimed.