Uncollectable Bills and Tax: What Happens When Invoices Go Unpaid?

The tax implications for a business if billings are not paid.

Uncollectable bills position a considerable challenge for every business. Dive Funding’s 2025 UK business debt report (April 2025) exposed that the average financial obligation per company stands at ₤ 365,375– funds that could otherwise maintain healthy cashflow and monetary stability for the business. For that reason, remaining on top of non-payments is important.

However, every business will ultimately encounter debts that can not be collected. Crossing out bad debts comes with particular tax implications that vary based on whether the financial obligations are trading or non-trading, and whether business runs as a company, sole trader, or partnership.

Bad debt deductions matter just for businesses using the accruals method of accounting, as income from credit sales is recognised when the sale takes place (or invoice issued), not when payment is received. Companies and self-employed businesses with a turnover going beyond ₤ 150,000 a year are required to prepare their accounts utilizing the ‘accruals’ basis. For that reason, if a financial obligation becomes uncollectible, a reduction is required to change for the invoice that was formerly consisted of in the accounts.

HMRC allows for the write-off of uncollectable bills; however, as ever, conditions apply. Relief can be declared on debts that are irrecoverable or thought about to be so. This covers circumstances where the debtor can not be traced, has actually been stated bankrupt or the company has been liquidated (HMRC will accept court documents as evidence of non-recovery, unless the liquidator suggests that some payments will be made). Relief is likewise possible in cases where the lender thinks that payment is unlikely.

When potential bad debts are recognized, HMRC anticipates the creditor to have cleared up and proportionate efforts to recover the quantities owed, including records supporting the decision.

For fairly little debts, a few automatic tip letters may suffice. If no payment is received, the lender can use bad debt relief by subtracting from profit– HMRC will likely accept a claim. Financial obligations of more significant quantities (e.g., ₤ 10,000 or more) will need the complaintant to take extra actions, such as employing a debt collector. Understand that many debt collectors will not handle financial obligations of less than ₤ 600.

Bad debt relief is given in the period when the business identifies that a debt is irrecoverable, preferably in the very same duration the billing was released. This way, tax will not be payable on overdue billings. If the financial obligation is not identified till the following period, it may take a complete year before relief is granted

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

• The VAT on the supply need to have already been represented and paid to HMRC.
• The financial obligation must be crossed out in the provider’s routine VAT accounts and moved to a different bad debt account.
• The value of the supply need to not surpass the normal asking price.
• The financial obligation ought to not have actually been paid, offered, or factored through a valid legal task.
• The debt need to stay unpaid for at least six months after the later of the payment due date or the supply date. If a billing does not specify a payment date, the billing date is used.

If the debt is ultimately paid after relief has been declared, the payment will be categorized as income for the year it is gotten. If VAT was formerly recovered, the provider business will require to repay this VAT.

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