How to get tax relief on bad debt

If your business is suffering in the form of bad debts, getting tax relief at the earliest possible stage can help to reduce the pain.  Ian Orgill, looks at what you claim for and when?

Once your business has made a sale it should be treated as income for your business even if you don’t get paid. However, to compensate you can claim a debt that’s gone bad as a business expense. The amount claimable is the unpaid sum excluding any VAT.

Lost time is lost tax

If you fail to identify bad debts and claim a deduction for them, it means that you will have paid tax on sales for which you have not received the cash. That’s essentially handing over your cash to HMRC for nothing. Businesses that have been out of pocket for years because they haven’t made a proper review of their debtors at the end of their financial year, so you really should take action.

Specific provisions

The priority is identifying those debts you can claim for. You can’t make a general estimate, even where you have a lot of low value transactions which you know will result in some bad debts. Each and every debt has to be considered individually.

Hindsight can speed up tax relief

There are situations where a debt appears good at the end of your accounting period but subsequently becomes bad. In this situation, HMRC will accept a claim for relief.

In summary

It’s advisable to maximise tax relief for bad debts. Prior to signing your annual accounts make a final review of all the debts included. You may not have been aware that a debt was going bad at the time but subsequent events may now show that it is.

If you are confident that a debt is not going to be paid, you can claim it as an expense in your accounts. You can decide whether a debt is bad right up to the point the annual accounts are finalised, so make a detailed review before signing them off. Identifying doubtful debts could save you significant amounts in tax.


This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.

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