Writing off an unpaid invoice

Which basis are you on

Since the 2024/25 tax year the cash basis is the default for sole traders and partnerships. Under it, income counts when the money arrives and expenses count when they leave, so your accounts follow your bank rather than your invoice book.

The consequence for a bad debt is neat: you never declared the unpaid invoice as income, so you never paid tax on it, so there is no relief to claim and nothing to adjust. The loss is real, but it has already been accounted for by the money simply not being there.

Traditional accruals accounting is the alternative, and some businesses elect for it. There, income is recorded when you invoice, so the unpaid invoice went into your figures and was taxed. When the debt becomes genuinely irrecoverable you write it off and take the deduction, which reduces your taxable profit for that period.

If you do not know which one you are on, look at whether your accounts were prepared from your invoices or from your bank. If you are unsure, that is a question for whoever prepares them, and it is worth the phone call, because it changes the answer to everything below.

What counts as genuinely irrecoverable

You cannot write off a debt because it has become annoying. On accruals accounting the write-off has to be a real judgement that the money will not be collected, and it has to be reflected in your books.

The kind of evidence that supports it is the record you would have built anyway: the reminders, the letter before action, the customer being untraceable, the company being dissolved or in liquidation, or a judgment you have been unable to enforce.

Keep it. A write-off backed by a paper trail is straightforward. A write-off with nothing behind it is the kind of thing that looks like a decision made for tax reasons, because that is what it looks like.

VAT bad debt relief

This one is separate from income tax and it is the part most often missed. If you are VAT registered and you accounted for VAT on an invoice that was never paid, you handed HMRC money the customer never gave you. VAT bad debt relief lets you claim it back.

The conditions are that the debt is at least six months old, measured from the later of the payment due date and the date of supply, that you have written it off in your accounts by transferring it to a bad debt account, and that you claim within four years and six months of that point. You reclaim it as input tax on your VAT return.

If the customer later pays, you have to pay the VAT back. That is normal and is not a penalty, it just puts everyone back where they would have been.

If you use the VAT Cash Accounting Scheme, none of this applies to you, because you only account for VAT when you are paid. Nothing left your hands, so there is nothing to reclaim.

Writing it off does not cancel the debt

This is worth being clear about. A write-off is an accounting decision about your own books. It has no effect on whether the customer owes you the money, and it does not stop you pursuing it.

You still have six years from the date the debt fell due to bring a claim in England, Wales and Northern Ireland, and five in Scotland. Plenty of debts written off in year one have been paid in year two after a letter arrived.

If it is paid after you wrote it off, it goes back into your accounts as income for the period you received it, and any VAT you reclaimed goes back too.

The decision that is actually being made

Most of the time the write-off question is not really about tax. It is about whether to stop spending time on it, and the tax treatment is a small consolation either way.

The useful way to frame it is what the recovery is worth against what pursuing it costs, in your hours as much as in fees. A £400 invoice from a customer who has vanished is not worth six months of your attention, and the honest thing to do with it is close it and put the effort into not repeating it.

That is what makes the difference next year. One bad debt written off is business. The same bad debt three times is a deposit policy that needs changing, a payment term that is too long, or a customer type worth turning down.

Common questions

Can I claim tax relief on an unpaid invoice?

Only if you use traditional accruals accounting, where the invoice was recorded as income and taxed. On the cash basis, which has been the default for sole traders since the 2024/25 tax year, you never declared the money, so there is no relief to claim and nothing to adjust.

How do I claim VAT back on an unpaid invoice?

Through VAT bad debt relief, if the debt is at least six months old measured from the later of the due date and the date of supply, and you have written it off in your accounts by moving it to a bad debt account. You reclaim it as input tax on your VAT return, within four years and six months. It does not apply if you use the VAT Cash Accounting Scheme.

What happens if the customer pays after I have written the debt off?

It goes back into your accounts as income for the period you actually received it, and if you claimed VAT bad debt relief on it, that VAT is repaid to HMRC. Writing a debt off never stops you from being paid later.

Does writing off a debt mean I cannot chase it any more?

No. A write-off is a decision about your own books and has no effect on the customer's obligation. You have six years from the due date to bring a claim in England, Wales and Northern Ireland, and five in Scotland.

How long should I chase before writing an invoice off?

There is no fixed answer, but the sequence is what matters more than the timing: reminders, a letter before action, and a decision about whether a court claim is proportionate. Once you have been through that and the answer is no, further chasing is usually costing you more than the debt.

Do the maths

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