Is bad debts
tax deductible?

Partly. If you use traditional accounting, you can claim amounts included in your turnover that you will never receive, once you are sure they cannot be recovered (GOV.UK). If you use the cash basis, the default for most sole traders, there is nothing to claim: unpaid invoices were never counted as income (HMRC BIM72030).

When a customer never pays, what happens for tax depends on your accounting. On the cash basis you only count money when it arrives, so an unpaid invoice was never taxed. On traditional accounting you counted the invoice as income when you issued it, so you need to take it back out once you know you will not be paid.

Is bad debts tax deductible?

The HMRC rule

On traditional accounting, money included in turnover that will never be received can be written off. On the cash basis there is nothing to claim, because unpaid income was never counted. The rule comes from When your customer does not pay you, UK property notes, SA105.

GOV.UK says that on traditional accounting you can claim amounts included in your turnover that you will never receive, but only when you are sure they will not be recovered, and not debts not included in turnover, debts relating to fixed assets, or bad debts that are not properly calculated (legal and financial costs). The SA103F notes put irrecoverable debts in box 27, only for traditional accounting (SA103F notes). HMRC's manual says a business using the cash basis does not need to account for bad debts (BIM72030).

When you can claim it

• Specific unpaid invoices included in turnover and now irrecoverable, on traditional accounting.
• Partial write-offs, such as a dividend received in a customer’s insolvency.
• Costs of chasing the debt, as legal or collection fees.
• VAT bad debt relief, separately, if VAT registered.

When you cannot

• Unpaid invoices on the cash basis, which were never income.
• General provisions or estimates.
• Debts that were never in turnover.
• Debts from selling fixed assets, such as equipment or premises.

What to claim instead

On the cash basis, you simply never record the unpaid invoice as income. On traditional accounting, keep chasing the debt and write it off only when recovery is unlikely. If a written-off debt is later paid, include the payment as income in the year you receive it.

How to decide if you can claim it

1. Was it for the business? A cost is only allowable if you incur it wholly and exclusively for the business. If it also serves a personal purpose that cannot be separated, such as clothing that keeps you warm or a meal that keeps you going, HMRC disallows it.
2. Is part of it personal? Where a cost has a business part you can identify, such as the business calls on a phone bill or the business miles in a car, you claim that part and leave the rest out, on a reasonable basis you can explain.
3. Is it a running cost or something you keep? It is a running cost, so on the cash basis it counts when you pay it and on traditional accounting when you incur it. Nothing about it needs spreading over later years.
4. Is there a specific rule? For bad debts, the deciding rule is bad debts: on traditional accounting, money included in turnover that will never be received can be written off. On the cash basis there is nothing to claim, because unpaid income was never counted.

Worked example: a customer goes bust

A web designer on traditional accounting invoiced a client £3,200 in March, which was included in her turnover. In the next year the client goes into liquidation, and the liquidator pays nothing. She writes off £3,200 in box 27. Had she used the cash basis, the £3,200 would never have been in her income, and there would be nothing to write off.

When a debt is bad

A debt is bad when you are reasonably sure it will not be paid, for example because the customer has become insolvent, disappeared, or clearly cannot pay despite reasonable chasing. The write-off must be a specific debt, based on the facts at the time, not a general percentage of your sales.

Cash basis and bad debts

The cash basis became the default for most sole traders from April 2024. Under it, you record income when you receive it, so unpaid invoices never enter your profit and there is no bad debt to claim. The trade-off is that you do not pay tax on money you are still waiting for.

Recovered debts

If you write off a debt and the customer later pays some or all of it, the payment is income in the year you receive it. On the cash basis, it is simply income when received. Keep a record of written-off debts so you recognise later payments.

VAT bad debt relief

If you are VAT registered and account for VAT on invoices, you can reclaim the VAT on a bad debt once it is at least six months overdue and written off in your records. That is a VAT relief, claimed on your VAT return, separate from the income tax write-off. Cash accounting for VAT avoids the issue.

Chasing costs

Costs of chasing a debt, such as debt collection agencies, solicitors and court fees, are allowable professional or legal fees, whether or not you recover the debt. Statutory late payment interest and compensation you receive from a business customer is income.

Where it goes

Bad debts go in irrecoverable debts written off, box 27 of the full self-employment pages, only for traditional accounting. General provisions and debts not in turnover also go in box 42 if included. Landlords on traditional accounting put irrecoverable rent in box 29 of the UK property pages.

If you are a landlord

Landlords using traditional accounting can deduct rent that was included in income but is irrecoverable, in box 29 of the UK property pages (SA105 notes). Most landlords use the cash basis, where unpaid rent is never income.

Where it goes on your return and in MTD

For a sole trader, the allowable part goes under irrecoverable debts written off (SA103F box 27 on the full self-employment pages). Under Making Tax Digital for Income Tax, it goes in the same category of your quarterly update, which is the category TapTax files it under when you record the cost.

For a landlord, it belongs in other allowable property expenses (SA105 box 29 on the UK property pages), and in the matching category of a Making Tax Digital property update.

If your turnover was under £90,000, you can use the short self-employment pages (SA103S), which ask for a single figure for total allowable expenses rather than a box-by-box breakdown, and the full pages let you give just a total in box 31 too. The category still matters for your own records and for Making Tax Digital, where each quarterly update uses the same categories unless you choose to send one consolidated figure.

Most sole traders now use the cash basis, the default from the 2024/25 tax year, which counts a cost when you pay it. On traditional accounting you count it when you incur it, and equipment you keep goes through capital allowances rather than expenses.

How much an allowable cost saves

The value of a deduction is the tax it removes from your profit, not the cost itself. At the basic rate a sole trader saves 26p for every pound of allowable expense, at the higher rate 42p, and in the personal allowance taper between £100,000 and £125,140 as much as 62p. Landlords pay no Class 4 on rental profit, so they save 20p or 40p.

What £1,000 of allowable expense saves a sole trader in 2026/27

• Basic rate (20% + 6%)£260
• Higher rate (40% + 2%)£420
• Additional rate (45% + 2%)£470
• Allowance taper band (60% + 2%)£620

Records to keep

Keep the invoice, your chasing correspondence and evidence of why the debt is irrecoverable, such as insolvency notices. Record the write-off date and any later recovery.

From 6 April 2026, sole traders and landlords with qualifying income over £50,000 keep these records digitally and send quarterly updates under Making Tax Digital, falling to £30,000 from April 2027 and £20,000 from April 2028. The MTD requirement checker shows when it applies to you.

Common mistakes

• Writing off debts on the cash basis, reducing income twice.
• Using a percentage provision.
• Forgetting to include recovered debts as income.

Related expenses

This item sits in the irrecoverable debts written off category. The A to Z of expenses answers the same question for every other cost.

TapTax sorts each cost into the right category as you record it, applies the business share where you set one, and keeps the receipts with the figures, ready for your quarterly updates and final return.