Keeping on Top of Your Bad Debts:

In today’s challenging economic climate, it’s no surprise that many businesses are carrying higher-than-normal levels of unpaid invoices. While your draft accounts may already reflect the reality of these outstanding debts, securing tax relief on them isn’t always straightforward. HMRC has clear expectations—and meeting them is key to ensuring you claim the relief you’re entitled to.

Debt in your hand

Accounting vs. Tax Treatment: Not Always the Same

Your financial statements must give a true and fair view of your business, which includes adjusting for debts that are unlikely to be paid. Without this, your accounts could show artificially inflated profits based on sales that will never turn into cash.

But when it comes to tax, the rules are different.

Even if your accounting estimate for bad debts is reasonable and professionally prepared, HMRC won’t automatically accept it for tax purposes. Instead, tax relief must be supported by stricter evidence and specific criteria.

No Estimates Allowed: HMRC Wants Precision

While your accounting system may use an overall provision for doubtful debts, HMRC requires a more granular approach.

You cannot:

• estimate the total value of expected bad debts, or

• use historical percentages or industry norms.

Instead, HMRC expects you to review each individual debtor account and assess whether that specific debt has become irrecoverable.

Calculator - show your workings

Debt Recovery Efforts: Show Your Work

Before giving you tax relief, HMRC expects to see that you’ve made reasonable and proportionate efforts to recover the money you’re owed. What counts as “reasonable” depends on the size of the debt:

Small Debts (e.g., around £250)

HMRC will typically accept:

• A couple of reminder emails

• A written chaser or statement

These efforts show you’ve acted sensibly without wasting resources.

Large Debts (e.g., £10,000 and above)

A higher level of action is expected, such as:

• Repeated attempts to contact the debtor

• Using a debt collection agency

• Issuing a Letter Before Action

• Taking court action if appropriate

The larger the amount, the more robust your attempts should be.

Special Case: When a Debtor Goes Into Liquidation

If the customer has entered liquidation, HMRC usually accepts that the debt is bad—unless there’s a realistic chance that the liquidator will make a payment.

In these cases:

• You can claim relief on the amount unlikely to be recovered.

• If the liquidator predicts a partial payout, only the unrecoverable portion qualifies.

  
  

Debt tipping point - monitor changes

Be Proactive: Timing Matters for Tax Relief

You can only claim tax relief in the accounting period in which you decide the debt became irrecoverable.

This means:

✓ If the debt goes bad this year → you claim relief this year.

✗ If you don’t identify it until next year → your tax deduction could be delayed by a full year.

Tip: Review your debtor list regularly—don’t wait until year-end.

Keep Monitoring: Bad Debts Can Change Status

Right up until you sign off your accounts, HMRC expects you to update the position.

• If a debt you thought was bad is suddenly paid – you cannot claim relief.

• If a “good” debt turns bad shortly before sign-off – you can claim relief now.

A final check of your debtor ledger before approving the accounts is best practice and ensures accuracy on both the tax and accounting fronts.

Key Takeaways

Key Takeaways

• HMRC does not allow estimated bad debt provisions for tax—each debt must be assessed individually.

  
  

• You must make reasonable attempts to recover the money, proportionate to the size of the debt.

  
  

• Tax relief is only available in the period when the debt becomes irrecoverable.

  
  

• Continue monitoring debts right up until accounts are signed.

  
  

• Liquidation usually confirms a debt as bad, but only the unpaid portion qualifies.