Most businesses will encounter a customer who simply doesn’t pay — despite reminders, calls and formal notices. When a debt becomes irrecoverable, you need to know how to handle it correctly in your accounts and whether you can claim tax relief.
What Is Bad Debt?
A bad debt is money owed to your business that you believe is irrecoverable. This might be because a customer has become insolvent, disappeared or simply refuses to pay despite exhausting all collection options.
💡 Key takeaway
You can only write off a debt once you’ve made genuine attempts to collect it — writing off early to reduce tax is not acceptable to HMRC.
When Can You Write Off a Debt?
HMRC requires you to have taken “all reasonable steps” to recover the debt before writing it off. Document your collection attempts — emails, calls, formal letters. If you’ve issued a County Court Judgment that hasn’t been satisfied, this is strong evidence the debt is irrecoverable.
How to Write Off Bad Debt in Your Accounts
In your accounting software, create a bad debt expense account. Issue a credit note against the original invoice (or journal the bad debt expense). This removes the debtor from your accounts and records the loss as a business expense.
VAT on Bad Debt
If you’ve already paid VAT on an invoice that has become irrecoverable, you can reclaim the VAT through Bad Debt Relief — provided the debt is at least 6 months old from the payment due date and you’ve written it off in your accounts.
Tax Relief on Bad Debts
Genuinely irrecoverable debts are an allowable expense for income tax and corporation tax purposes. If a debt you’ve written off is later recovered (for example in an insolvency recovery), you must reinstate it as income.
Frequently Asked Questions
Can I claim VAT back on bad debts?
Yes — Bad Debt Relief allows you to reclaim VAT on debts that are at least 6 months overdue and have been written off. Claim on your VAT return.
Is bad debt tax deductible?
Yes — irrecoverable debts are an allowable deduction for income tax and corporation tax.
What records do I need to claim bad debt relief?
Evidence of the original supply, invoices, evidence of non-payment and proof of collection attempts. Keep these for at least 4 years.
