A debt becomes "bad" when you decide it will not be recovered — the customer has disappeared, become insolvent, or the cost of recovery is more than the debt. For accounting, you write it off as an expense.
If you have already paid VAT on the invoice, you may be able to reclaim it through bad debt relief once the debt is more than six months overdue and written off in your accounts.
Example
A £700 invoice to a client whose company has been dissolved is written off as a bad debt.