Even with good credit control, some customers never pay. A bad debt is an invoice you do not expect to collect. Writing it off properly keeps your accounts honest and may reduce your tax. This guide is general information, so check GOV.UK or ask your accountant.
1. Try to collect first
Before you write anything off, take reasonable steps: reminders, a firm letter and a phone call. See our late payment email templates. For business customers you can claim statutory interest and fixed compensation, and if the amount is worth it you can consider a formal claim through the courts.
2. Decide when it is a bad debt
A debt is generally bad when you have made reasonable efforts to collect it and there is no realistic prospect of payment, for example the customer has gone out of business or cannot be traced. Keep a record of what you did.
3. Write it off in your books
You normally do this with a credit note or a bad debt write-off entry, so the invoice no longer shows as owed. Record the reason. See how to issue a credit note, and check your aged receivables report to find candidates.
4. Income tax relief
- If you use accrual accounting, you have already counted the income, so a specific bad debt can be deducted as an expense.
- If you use cash basis, income is only counted when received, so there is nothing to write off for tax.
See cash vs accrual accounting.
5. VAT bad debt relief
If you have paid VAT on an invoice that the customer never paid, you may be able to claim it back, once the debt is more than six months overdue and has been written off in your accounts. Conditions apply, you must keep records, and you cannot claim under every VAT scheme. Check GOV.UK for the current rules.
6. Prevent the next one
- Check new customers before you start.
- Take deposits on large jobs.
- Use clear payment terms and invoice promptly.
- Watch the ageing report every week.
For more ideas, read nine ways to get paid faster.
How AvrioBooks helps
The aged receivables report shows which invoices are overdue and for how long, and credit notes let you write a debt off cleanly. See how to read an aged receivables report.
Frequently asked questions
When is an invoice a bad debt?
When you have made reasonable efforts to collect it and there is no realistic prospect of payment.
How do I write off an invoice?
Usually with a credit note or a bad debt write-off entry, recording the reason, so it no longer shows as owed.
Can I claim back VAT on a bad debt?
You may be able to, once the debt is over six months overdue and written off in your accounts. Conditions apply, so check GOV.UK.
Do cash-basis businesses get bad debt relief?
No. Under the cash basis, income is only counted when received, so an unpaid invoice never counted as income.
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