Bad debts

Conditions

1. Sole traders: GOV.UK says that if you're using traditional accounting, you can claim for amounts of money you include in your turnover but will not ever receive. You cannot claim for debts not included in turnover, or for debts related to the disposal of fixed assets, for example land, buildings, machinery.
2. The statutory rule is that no deduction is allowed for a debt owed to the person carrying on the trade, except so far as the debt is bad, the debt is estimated to be bad, or the debt is released wholly and exclusively for the purposes of the trade as part of a statutory insolvency arrangement (section 35 ITTOIA 2005). If the debtor is bankrupt or insolvent, the whole of the debt is estimated to be bad, except so far as any amount may reasonably be expected to be received on the debt (section 35(2) ITTOIA 2005).
3. GOV.UK says you can only write off these debts if you're sure they will not be recovered from your customer in the future. HMRC's manual allows a doubtful debt to the extent estimated to be bad (BIM42701). Where a debt is doubtful rather than plainly bad, an accountant can advise how much to deduct.
4. Timing: HMRC's guidance is that a deduction for a bad or doubtful debt is made in the profits of the year in which the debt becomes bad or doubtful (BIM42701). Something that happens after your year end but before your accounts are finalised can count where it shows the debtor's position at the year end, such as the debtor going into administration or liquidation in that gap. It does not count where the debtor had the capacity to pay at the year end and circumstances changed afterwards (BIM42705).
5. Income Tax only (not limited companies): each debt is looked at on its own facts. HMRC says a general reserve, for example one calculated as a percentage of total debts or of total sales, should not be admitted as a deduction if made without regard to the circumstances of the particular debtors (BIM42701). GOV.UK's example is that you can not just estimate that your debts are equal to 5% of your turnover.
6. Cash basis: there is no bad debt deduction. Section 35 does not apply in calculating the profits of a trade on the cash basis (section 32A ITTOIA 2005), and GOV.UK says bad debts cannot be claimed if you use cash basis accounting because you've not received the money from your debtors.
7. From 6 April 2024 all eligible businesses must use the cash basis unless they elect to calculate profits under generally accepted accounting principles (BIM70000). A sole trader or partnership therefore needs to be using traditional accounting for the year to claim a bad debt.
8. If a debt you deducted is later recovered, HMRC's guidance is that the amount recovered, or any excess over its written-down value, is brought into credit in the year of recovery (BIM42730).
9. Limited companies: a limited company cannot use the cash basis. A company's bad debts in respect of trade receipts are dealt with under the loan relationship rules rather than section 35 (BIM42701). An impairment loss on a debt for an unpaid business payment, or a later reversal of it, is dealt with under those rules (CFM41030; section 479 CTA 2009). HMRC says no relief is normally available where the debt is between connected companies (CFM33220). Debts that are not money debts follow a separate rule, allowing a deduction by way of impairment loss or a release under a statutory insolvency arrangement (section 55 CTA 2009). Which rule applies to a company's debts is a question for its accountant.
10. Employees: an employee can deduct an expense only where they are obliged to incur and pay it as holder of the employment (section 336 ITEPA 2003). Bad debt relief is a rule for calculating the profits of a trade, so it does not apply to employment income.

Common mistakes

• Claiming a bad debt while on the cash basis. Section 35 does not apply on the cash basis, and the income was never recorded in the first place.
• Income Tax only (not limited companies): writing off a percentage of all debtors rather than looking at each debt. GOV.UK's example is that you can not just estimate that your debts are equal to 5% of your turnover.
• Treating a doubtful debt as all or nothing. The statute allows a deduction so far as a debt is estimated to be bad, and for an insolvent debtor leaves out any amount that may reasonably be expected to be received.
• Claiming a debt that was never included in turnover, or one from selling a fixed asset such as machinery. GOV.UK says neither can be claimed.
• Forgetting to bring a recovered debt back into profits in the year it is recovered (BIM42730).

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 has elected to use traditional accounting, with accounts running to 5 April. She invoiced a client £3,500 in March 2025 and included it in her turnover. During 2025/26 the client company is struck off and she has no realistic prospect of payment, so she deducts £3,500 as a bad debt in her 2025/26 accounts, the year the debt became bad. A colleague doing identical work on the cash basis never recorded the £3,500 as income because it was never paid, so there is nothing to deduct, and no tax was ever paid on it.

Frequently asked