When should I write off an unpaid invoice?

Write it off when you have a real reason to think it will not be paid, such as the customer going under, a dispute you have given up on, or repeated chasing with no response. Keep the evidence. Writing it off in your books does not stop you continuing to pursue the customer for the money.

How long must I wait to reclaim the VAT?

At least six months from the later of the date payment was due and the date of supply, according to VAT Notice 700/18. The debt must also be written off in your VAT accounts. A claim has to be made within four years and six months of that same date, so very old debts can be lost.

Should I issue a credit note instead?

No, not simply because the customer has not paid. VAT Notice 700/18 says so directly. A credit note is for a genuine mistake, an overcharge or an agreed reduction in value, whereas bad debt relief says the sale stands and the customer failed to pay. Keep the two separate in your records.

What if the customer pays after I have claimed relief?

You repay the VAT element of what you receive. HMRC says to report it in box 1 of the VAT return for the period in which the money arrives. In your books, reverse the write-off for the net amount so your income is right. Keep a note linking the receipt back to the original claim.

I use the cash basis. Can I deduct the bad debt?

No deduction is needed. Under the cash basis you only count income when you are paid, so an invoice nobody paid was never in your income. Deducting it as well would claim relief for money you never reported. The same logic applies to VAT Cash Accounting, where VAT on the sale is only due on receipt.

Writing Off a Bad Debt: Books, Tax and VAT Relief

To write off a bad debt, you remove the unpaid invoice from your debtors and record it as a cost, which normally reduces your taxable profit if you keep accruals-based accounts. If you are VAT registered, you can usually also reclaim the VAT you paid HMRC on that sale, but only after six months and only if you follow the steps in the right order. The dates are what catch people out.

Key takeaways

A bad debt is a sale you recorded and now do not expect to be paid for.
A write-off for a specific customer is treated differently from a general "just in case" provision.
VAT bad debt relief needs a six-month wait, a write-off in your VAT accounts and a claim in box 4.
Under the cash basis or VAT Cash Accounting, there is usually nothing to claim, because the sale was never counted.
If the customer pays later, part of that money goes back to HMRC.

What counts as a bad debt?

A bad debt is money a customer owes you that you have decided, on reasonable grounds, you will not collect. A slow payer is not yet a bad debt; a late invoice still has value and you should be chasing it. Our guide to chasing late payments covers that stage. The write-off comes after it, when you have run out of realistic options or the sums no longer justify more effort.

Three questions that decide your treatment

Before you touch your software, work through this table. We built it because the bookkeeping, income or corporation tax and VAT answers do not all arrive at the same time, which is what most short guides skip over.

Your set-up	In your accounts	VAT
Accruals, standard VAT accounting	Write off net amount to bad debts expense	Claim relief in box 4 after six months
Accruals, not VAT registered	Write off the full invoice to bad debts expense	Nothing to do
Accruals, VAT Cash Accounting	Write off net amount to bad debts expense	No claim: VAT was never paid on the unpaid sale
Cash basis, not VAT registered	No entry affects profit: the income was never counted	Nothing to do

The VAT conditions come from HMRC's VAT Notice 700/18. If you are on the Flat Rate Scheme, check the scheme's own rules or ask for advice before claiming. Not sure which basis you use? Read cash basis vs accruals first.

How the tax deduction works

A deduction is generally available for a debt you have specifically identified as irrecoverable, in whole or in part. A general reserve, such as "5% of all debtors", may be sensible in management accounts, but it does not normally reduce your tax bill. HMRC sets out its approach in the Business Income Manual, which notes that different provisions apply for Income Tax and Corporation Tax, so a company should confirm its own position. Either way, record the customer and invoice by name, and keep the reason. You do not need to wait six months for this part; the six-month rule is purely about VAT.

Worked example: a £2,400 invoice

Illustrative example. "Fenwick Joinery Ltd" is an invented, VAT-registered company using standard VAT accounting and accruals accounts. It makes a supply on 1 March 2026 and invoices £2,000 plus £400 VAT, payable by 31 March 2026. It pays the £400 to HMRC on its normal return. The customer stops responding.

Earliest VAT date: six months from the later of supply and due date runs from 31 March, so the relief opens after 30 September 2026.
Write-off: in October 2026 the company moves the debt out of debtors: £2,000 to bad debts expense, and £400 to a separate VAT bad debt record.
Claim: its VAT quarter ending 31 December 2026 includes £400 in box 4.
Last chance: the claim would have had to be made within four years and six months of 31 March 2026, so by 30 September 2030.
Part payment later: in 2027 the customer pays £600. The VAT element is one-sixth, £100, which goes in box 1 for that period. The other £500 is credited back as bad debt recovered.

Now look at the cost. Fenwick has lost £2,000 of income it may have spent money earning. Relief reduces the damage but does not replace the cash, which is why credit checks and deposits usually beat a good write-off process.

A write-off checklist for your bookkeeping

Pull the invoice, the contract or order and the chasing history.
Record why you decided the debt will not be paid, and the date you decided.
Note the later of the supply date and the payment due date. Diarise six months on.
Post the net amount to a named bad debts account, not to sales or sundry costs.
Keep the VAT in a separate bad debt account showing the amount written off, VAT claimed, customer name and invoice details.
Claim the VAT in box 4 of the return covering the period in which you meet the conditions.
Retain these records for four years from the date of the claim, in addition to your normal VAT records.
Flag the customer so that any later receipt triggers a repayment rather than being booked as ordinary income.

If you are also under Making Tax Digital for Income Tax, the bad debt should be in the right category before your next quarterly update, not tidied up at year end.

Common mistakes

Deleting or voiding the invoice. That removes the audit trail and may misstate your VAT. Keep the invoice and write it off properly.
Claiming the VAT too early. The six months is measured from the later date, not the day you lost patience.
Reducing box 1 instead of using box 4. The claim belongs in box 4.
Allocating part payments wrongly. HMRC treats payments as going to the earliest supply, unless the customer specifies a particular supply and pays it in full.
Forgetting the old debts. A review once a year, ideally before your year end, avoids missing the four-year-and-six-month limit.
Double-counting under the cash basis. Income you never reported cannot also be an expense.

Would you like your debtors reviewed before your year end? Our bookkeeping service starts from £150 a month, and our VAT returns service from £120 a quarter. Get in touch to talk it through, or see how the VAT Cash Accounting Scheme could reduce this risk.

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