Bad debts

Conditions

1. Bad debts are allowable only under traditional (accruals-basis) accounting. GOV.UK's self-employed expenses guidance states explicitly: 'Under traditional accounting only: amounts included in turnover that won't be recovered, provided you're certain recovery won't occur. This cannot be claimed under cash basis accounting.' (Updated November 2024.)
2. From 2024/25, the cash basis is the default method for unincorporated businesses (sole traders and partnerships) under reformed rules (BIM72005). Under cash basis, income is only recognised when cash is received, so an unpaid invoice was never brought into turnover and there is nothing to write off. Businesses on the default cash basis therefore have no bad debt deduction to make — but equally, no tax has been paid on the uncollected amount.
3. To claim bad debt relief, a sole trader or partnership must either have elected out of the cash basis and used traditional accounting throughout the tax year, or have circumstances that take them outside the cash basis. Limited companies prepare accounts under UK GAAP (accruals basis), so the position is available to them in principle.
4. For a debt to qualify, HMRC's Business Income Manual (BIM42701) sets four conditions: the debt must be genuinely irrecoverable (not merely slow or in doubt); it must have been included in the business's turnover at some earlier point; no general provision against debts as a class is allowable — each debt must be assessed individually; and the write-off should be taken in the accounting period in which the debt becomes bad.
5. The write-off must be for a specific, identifiable amount rather than a general percentage of debtors. A catch-all provision such as 'we estimate 2% of invoices will not be paid' does not qualify. An entry such as 'Invoice 1047 to ABC Ltd remains unpaid after 18 months and the company has been dissolved' does qualify, provided the evidence supports it.
6. If a debt that has been written off is later recovered — for example because an administrator pays a dividend — the amount recovered must be brought back into taxable income in the year it is received.
7. Employees do not invoice clients and are not exposed to trade bad debts — this relief is not available to employees.

Common mistakes

• Attempting to claim a bad debt write-off while on the cash basis — this is not available, as the income was never recognised to begin with.
• Claiming a general provision (for example, a percentage of all outstanding debtors) rather than writing off individually assessed specific debts.
• Writing off a debt prematurely where any realistic prospect of recovery remains, such as a debtor in administration that may yet pay a creditor dividend.
• Not keeping evidence that the debt was included in turnover — without a prior invoice or income record, HMRC can question whether the amount was ever taxed.

What to keep

• The original invoice confirming the amount was included in turnover.
• Evidence of failed recovery attempts: chaser letters, emails, solicitor correspondence, or a certificate of dissolution from Companies House.
• A formal write-off decision recorded in the accounts, showing the date the debt was determined to be irrecoverable and the specific amount written off.

Real-world example

A graphic designer using traditional (accruals) accounting invoiced a client £3,500 in March 2025. By the time she prepares her 2025/26 accounts, the client company has been struck off at Companies House. She writes off the debt and deducts £3,500 as a bad debt in her accounts. A colleague doing identical work on the default cash basis never recognised the £3,500 as income (it was never paid), so there is no deduction to claim — but equally no tax was ever paid on it.

Frequently asked

Related allowances