Writing Off Bad Debts as a UK Tradesperson — VAT Bad Debt Relief and How to Recover What You Can (2026)

Try to Recover the Money First

Before you write anything off, exhaust your recovery options — partly because cash is better than a tax deduction, and partly because HMRC and your accountant will expect you to have made reasonable efforts before treating a debt as bad. A structured chase costs little and resolves most late payments.

• Send a statement and a polite reminder: Many late payments are simply admin lapses. A clear statement showing the outstanding amount and the original due date often does the job.
• Phone the customer: A direct call is harder to ignore than an email and frequently surfaces the real reason for non-payment — a dispute, a cash-flow problem, or a missing invoice.
• Add statutory interest and compensation: Under the Late Payment of Commercial Debts (Interest) Act 1998 you can charge interest at 8% plus the Bank of England base rate on overdue business-to-business invoices, plus a fixed compensation sum per invoice (see the table below). This is your legal right even if your terms don't mention it.
• Issue a formal "letter before action": A final written demand stating that you intend to take legal recovery action if payment isn't made within a set period (often 7–14 days) is frequently the trigger that gets a stubborn debtor to pay.
• Use Money Claim Online (small claims): For straightforward debts, you can issue a county court claim online through Money Claim Online. It's designed to be used without a solicitor and is suitable for most trade debts. A County Court Judgment (CCJ) damages the debtor's credit, which is itself an incentive to settle.
• Instruct a debt recovery agency: For larger debts where you don't want to manage the process yourself, an agency can chase on your behalf, usually on a commission or fixed-fee basis. Weigh their cut against the amount owed.

There's a practical threshold here. Court fees, your own time and the risk that the debtor simply can't pay mean that chasing a small debt can cost more than it recovers. For small sums it's often more sensible to send a final demand, then write the debt off and reclaim the VAT, rather than spend days pursuing it. For larger amounts, formal action and a CCJ are usually worth the effort. The right cut-off depends on your business, but be honest about the time cost of chasing.

Statutory Interest and Compensation Bands

The fixed compensation you can add to a late commercial invoice depends on the size of the debt. These are statutory amounts under the 1998 Act and apply on top of the interest charge.

You can charge one fixed-sum compensation per overdue invoice. Statutory interest accrues daily from the day after payment was due until it's paid. These rights apply to business customers; the rules differ for consumer debts, so check before relying on them against a private homeowner.

When Does an Invoice Become a "Bad Debt"?

An unpaid invoice becomes a bad debt when you've reasonably concluded it isn't going to be paid. There's no single magic date, but the usual triggers are:

• The customer has become insolvent — entered liquidation, administration or bankruptcy — so there's little or no prospect of recovering the full amount.
• The customer has "gone away" — disappeared, stopped trading, or can't be traced despite reasonable efforts.
• There's been repeated non-payment over a sustained period despite proper chasing, and continuing to pursue it isn't commercially worthwhile.

The key word is specific. A bad debt is a particular, identified invoice you've decided won't be paid — not a vague worry that some of your debtors might default. That distinction matters a great deal for the tax treatment below.

VAT Bad Debt Relief — Reclaiming VAT You Already Paid

This is the part most tradespeople miss. If you're VAT registered and you've already paid HMRC the VAT on an invoice that your customer never paid, you can reclaim that VAT. You charged, say, 20% VAT, declared it on your VAT return, and handed it to HMRC — but the customer never settled the invoice, so you're effectively out of pocket for tax on income you never received. VAT bad debt relief gives that money back.

To claim, all of the following conditions must normally be met:

• You must have supplied the goods or services and accounted for and paid the VAT on that supply.
• The debt must be at least 6 months overdue, measured from the later of the payment due date or the date of supply.
• The debt must have been written off in your accounts — in practice, transferred to a separate bad debt account in your books.
• You must claim within 4 years and 6 months of the later of the payment due date or supply date. After that the relief is lost.

You make the claim by adding the VAT amount to Box 4 of your VAT return (the box for VAT reclaimed on purchases and other inputs). You don't need to tell HMRC separately, but you do need to keep records showing the original supply, the VAT paid, the amount written off and the date the debt became eligible.

One important catch: if the customer later pays all or part of the invoice, you must repay the corresponding VAT to HMRC. So if a written-off debt unexpectedly comes good, don't just pocket the lot — the VAT element has to go back.

Finally, this relief mainly matters under standard (accrual) VAT accounting, where you pay VAT based on the invoice date regardless of whether you've been paid. If you use the Cash Accounting Scheme, you only account for VAT once your customer pays you — so on an unpaid invoice you never handed the VAT to HMRC in the first place, and there's nothing to reclaim. The relief simply isn't needed.

Income Tax and Corporation Tax Treatment

Separately from VAT, writing off a bad debt can reduce your income tax or corporation tax bill — but exactly how depends on your business structure and which accounting method you use.

Sole Traders and Partnerships

If you use traditional accruals accounting — recording income when you invoice rather than when you're paid — then a specific bad debt that you write off is an allowable expense. You included that invoice as income, so when it goes bad you can deduct the written-off amount against your profits, which reduces your taxable income.

If you use the cash basis — where income only counts when the money actually arrives — there's nothing to write off, because you never recorded the unpaid invoice as income in the first place. You can't deduct income you never declared. Under the cash basis the bad debt simply never appears in your figures, so there's no separate relief to claim.

Limited Companies

For a limited company, a specific bad debt write-off is generally allowable for corporation tax. Companies typically prepare accounts on an accruals basis, so the income was recognised when invoiced and the write-off reduces taxable profit accordingly.

For everyone, the crucial rule is the same: the deduction must relate to a specific, identified debt that you've genuinely concluded won't be paid. A general provision — setting aside a vague percentage of your debtors "just in case" — is not allowable for tax. HMRC will only accept write-offs of particular debts you can name and justify, not blanket estimates.

How to Record a Bad Debt in Your Books

Writing a debt off isn't just deciding in your head that you won't get paid — it has to be reflected in your records to qualify for both VAT relief and the income/corporation tax deduction. The basic mechanics are:

• Post the unpaid amount to a bad debts expense account, clearing the outstanding balance off your trade debtors (sales ledger).
• For VAT relief, transfer the relevant amount to a separate bad debt account and keep a record showing the invoice, the VAT charged, the date it became 6 months overdue and the date you wrote it off.
• In bookkeeping software, most packages have a built-in option to mark an invoice as a bad debt or write-off, which posts the correct entries for you and keeps the audit trail tidy.
• If the customer later pays, reverse the relevant entries and, where you claimed VAT relief, account for the VAT again.

Keeping a clean record matters: if HMRC ever queries a write-off or a Box 4 adjustment, you want to be able to point to the specific invoice and the dates.

Preventing Bad Debts in the First Place

Recovering money and reclaiming VAT softens the blow, but the best bad debt is the one you never incur. A few habits sharply reduce your exposure:

• Take deposits: An upfront deposit on materials or before starting work means you're never fully exposed, and it filters out customers who were never going to pay.
• Use staged payments: On larger jobs, bill at defined milestones so you're paid as the work progresses rather than carrying the whole value to the end.
• Run credit checks on commercial customers: Before extending significant credit to a business, a quick credit check can flag firms that are a known payment risk.
• Set clear written terms: Spell out your payment window, late-payment interest and what happens if an invoice isn't paid — and put it on every quote and invoice.
• Don't over-extend credit to one customer: Letting a single client run up a large unpaid balance across several jobs concentrates your risk. Good credit control means invoicing promptly and pausing further work when a customer falls behind.

Frequently Asked Questions

Can I claim back the VAT on an unpaid invoice?

Yes, if you're VAT registered on standard accounting and you've already paid HMRC the VAT on that invoice. The debt must be at least 6 months overdue and written off in your accounts, and you claim by adding the VAT to Box 4 of your VAT return within 4 years and 6 months. If you're on the Cash Accounting Scheme, you never paid the VAT on an unpaid invoice, so there's nothing to reclaim.

Do I need to go to court before writing off a debt?

No. You don't have to obtain a court judgment to treat a debt as bad. What matters is that you've reasonably concluded it won't be paid and have written it off in your accounts. That said, making genuine recovery efforts first — reminders, a letter before action, and so on — is sensible both commercially and as evidence that the write-off is justified.

What if they pay after I've written it off?

If a customer pays a debt you'd already written off, you bring the payment back into your books as income and reverse the write-off. Where you claimed VAT bad debt relief on it, you must repay the corresponding VAT to HMRC — typically by adjusting your next VAT return. The recovered cash is genuinely yours, but the VAT element has to go back.