An overdue invoice is not automatically a bad debt. A customer may be late because of an admin error, a dispute or a short-term cash flow problem. It becomes a possible write-off when there is clear evidence that payment is unlikely or further action would add cost with little chance of success.
Do not base the decision on age alone. Before you write off bad debt, check the evidence, the debtor’s finances and the recovery options still available.
What Does Writing Off Bad Debt Mean?
Writing off bad debt is an accounting step. The unpaid amount is removed from your trade receivables and recorded as a loss because you no longer expect to receive it. This gives a more accurate view of the money your business is likely to collect.
Writing a debt off in your accounts does not normally cancel the customer’s duty to pay. HMRC distinguishes between an accounting write-off and formally releasing a debtor. A written-off debt may still be recovered later, subject to the circumstances and any legal time limits.
If payment is received after the write-off, your accounts and any tax relief claimed may need to be adjusted.
When Should You Consider a Bad Debt Write Off?
A write-off may be reasonable when reliable checks show there is little or no prospect of payment. This could apply when:
- the debtor company has entered liquidation and no return to unsecured creditors is expected
- the business has ceased trading and has no assets from which the debt could be recovered
- financial checks show serious distress, unpaid court judgments or no realistic ability to pay
- professional recovery attempts have failed and legal action is unlikely to produce payment
- the likely cost of court and enforcement action is higher than the amount you could realistically recover
Review each debt on its own facts. HMRC may expect evidence of how and when you decided that it was unlikely to be recovered.
An invoice should not be written off simply because the customer has ignored your calls or emails. Silence does not prove that the business has no money or assets. It often means that stronger recovery action is needed.
What Should You Do Before Writing Off Bad Debt?
Before accepting the loss, work through the following checks.
Confirm the Debt and Supporting Evidence
Check the invoice value, payment terms and customer’s correct legal name. Keep the contract, purchase order, delivery note and relevant emails. Clear records help answer a dispute or support a court claim.
Check the Debtor’s Current Position
Confirm whether the company is still trading or has entered liquidation, administration or dissolution. Its filed accounts, address and court judgment history may help show whether payment is likely.
Financial difficulty does not always make a debt unrecoverable. A viable business may still be able to pay in full or agree a suitable payment plan.
Use Commercial Debt Recovery
Repeated reminders often lose their impact. Referring the invoice to a debt collection agency shows that the matter has moved beyond routine credit control.
A specialist can contact the right people, address disputes and assess the debtor’s ability to pay. This may recover the invoice without going to court.
Review Legal Action Carefully
Court action can work against a business that can pay but refuses. It may increase your loss if the debtor has no funds or assets. Review the evidence, costs and chance of enforcement before issuing a claim.
Can You Claim VAT Relief on Bad Debt?
If your business has already accounted for and paid VAT on an unpaid invoice, you may be able to claim VAT bad debt relief. Under current HMRC guidance, the main conditions include:
- writing the debt off in your VAT accounts and transferring it to a separate bad debt account
- waiting at least six months from the later of the payment due date and the date of supply
- making the claim within four years and six months of that later date
- keeping the required invoices and bad debt records
Other conditions apply, including rules for debts that have been sold or factored. Ask your accountant to confirm the correct treatment for your business. If you later recover payment after claiming VAT relief, you must repay the VAT element included in that payment to HMRC.
Try to Recover the Invoice Before Writing It Off
Writing off a genuine commercial debt should usually be the final option, not the next step after routine reminders have failed.
If another UK business owes you at least £750 in unpaid invoices, Advocate can assess and recover the debt without charging your business. The debtor pays our costs under Late Payment Legislation, while you receive 100% of the invoice sums recovered. You will not pay us a fee whether we recover the debt or not.
If recovery is not possible, our findings can help you judge whether legal action has a reasonable chance of success or whether writing the debt off is more sensible.
Submit your unpaid invoices online to begin the recovery process.