Bad Debts: Can You Get Tax Relief?

Bad debts pose a significant challenge for every business. Swoop Funding’s 2025 UK business debt report (April 2025) revealed that the average debt per company stands at £365,375 – funds that could otherwise maintain healthy cashflow and financial stability for the business. Therefore, staying on top of nonpayments is essential.

However, every business will eventually encounter debts that cannot be collected. Writing off bad debts comes with specific tax implications that vary based on whether the debts are trading or non-trading, and whether the business operates as a company, sole trader, or partnership.

When Can a Claim Be Made?

Bad debt deductions are relevant only for businesses using the accruals method of accounting, as income from credit sales is recognised when the sale occurs (or invoice issued), not when payment is received. Companies and self-employed businesses with a turnover exceeding £150,000 a year are obliged to prepare their accounts using the ‘accruals’ basis. Therefore, if a debt becomes uncollectible, a deduction is needed to adjust for the invoice that was previously included in the accounts.

HMRC allows for the write-off of bad debts; but, as ever, conditions apply. Relief can be claimed on debts that are irrecoverable or considered to be so. This covers situations where the debtor cannot be traced, has been declared bankrupt or the company has been liquidated (HMRC will accept court documents as evidence of non-recovery, unless the liquidator indicates that some payments will be made). Relief is also possible in cases where the creditor believes that payment is unlikely.

Make An Effort

Once potential bad debts are identified, HMRC expects the creditor to have made reasonable and proportionate efforts to recover the amounts owed, including records supporting the decision.

For relatively small debts, a few automated reminder letters may suffice. If no payment is received, the creditor can apply bad debt relief by deducting from profit – HMRC will likely accept a claim. Debts of more significant amounts (e.g., £10,000 or more) will require the claimant to take additional steps, such as employing a debt collector. Be aware that many debt collectors will not take on debts of less than £600.

Bad debt relief is granted in the period when the business determines that a debt is irrecoverable, preferably in the same period the invoice was issued. This way, tax will not be payable on unpaid invoices. If the debt is not identified until the following period, it may take a full year before relief is granted.

VAT implications If the supplier is VAT-registered, bad debt relief (BDR) can be claimed if the goods have been supplied or services provided but payment has not been made.

To claim BDR, the following conditions must be met for each individual invoice:

• The VAT on the supply must have already been accounted for and paid to HMRC.
• The debt must be written off in the supplier’s regular VAT accounts and transferred to a separate bad debt account.
• The value of the supply must not exceed the usual selling price.
• The debt should not have been paid, sold, or factored through a valid legal assignment.
• The debt must remain unpaid for at least six months after the later of the payment due date or the supply date. If an invoice does not specify a payment date, the invoice date is used.

What Happens If the Debt Is Paid?

If the debt is eventually paid after relief has been claimed, the payment will be classified as income for the year it is received.

If VAT was previously reclaimed, the supplier business will need to repay this VAT.

Practical Tip

HMRC rarely accepts ‘general provisions’ for debts. Therefore, it is essential to maintain records of which debts have been reviewed, when they were reviewed, why the debt is believed to be uncollectible, and what actions have been taken to recover. A written debt chase and recovery policy is essential.