Irrecoverable debts written off
for sole traders

Irrecoverable debts written off is the category for money you counted as income but will never receive. It is box 27 on the full self-employment pages, and it only applies if you use traditional accounting. On the cash basis, now the default for most sole traders, unpaid invoices are never income, so there is nothing to write off.

What goes in this category

• Specific unpaid invoices included in turnover that are now irrecoverable.
• The unrecovered part of a debt after a customer’s insolvency.
• For landlords on traditional accounting, irrecoverable rent included in income.
• Only for traditional accounting.

What does not

• Any debts at all on the cash basis.
• General provisions, such as a percentage of turnover.
• Debts never included in turnover.
• Debts relating to fixed assets.

Items in this category

Cash basis or traditional accounting

On the cash basis, you record income when you receive it, so an unpaid invoice never enters your profit. On traditional accounting, you record income when you invoice, so you must write off bad debts to avoid paying tax on money you never got. The choice of basis decides whether this box is relevant.

Specific, not general

A bad debt must be a specific debt that you have good reason to believe will not be paid. GOV.UK says you cannot just estimate that your debts are equal to a percentage of turnover. Keep the evidence behind each write-off.

When to write off

Write off a debt when recovery becomes unlikely, for example when the customer enters insolvency, cannot be traced, or has ignored reasonable chasing and legal action is not worthwhile. If you later recover any of it, include it as income when received.

Debts and VAT

VAT bad debt relief lets a VAT-registered business reclaim VAT on a debt at least six months overdue and written off in its records. It is claimed on the VAT return and is separate from the income tax write-off.

Preventing bad debts

Clear payment terms, deposits, stage payments and prompt chasing reduce bad debts. Business customers who pay late can be charged statutory late payment interest and fixed compensation, which becomes income when received.

Partial recoveries and insolvency

When a customer enters insolvency, the insolvency practitioner may later pay a dividend of a few pence in the pound. Write off the part you do not expect to receive, and include any later payment as income when it arrives. If you are a creditor, submit a proof of debt promptly so you are included in any distribution.

Debts from related parties

Debts owed by family members or connected businesses deserve extra care. HMRC will expect evidence that the debt arose from a genuine trading transaction and that you took reasonable steps to collect it, just as you would with an unrelated customer. A write-off that is really a gift is not a bad debt.

Switching between accounting bases

If you move from traditional accounting to the cash basis, or back, transitional adjustments make sure income is taxed once and only once. Debts already taxed as income under traditional accounting are not taxed again when paid under the cash basis, and debts already written off stay written off. Take care in the year you switch.

Credit notes and disputes

If a customer refuses to pay because of a genuine dispute and you agree to reduce the invoice, issue a credit note. That reduces your sales rather than creating a bad debt. Keep bad debts for amounts the customer owes but cannot or will not pay, not for price reductions you agreed.

Debts for fixed assets

If you sell a piece of equipment or a vehicle and the buyer never pays, that is not a trading bad debt, because the sale was not part of your turnover. The loss is dealt with through capital allowances or capital gains rules instead. The same applies to money you lent to someone outside the trade, such as a friend or relative, which is a personal loss. Only debts that arose from your sales, and were counted in your turnover, can be written off here.

Records to keep

Keep the unpaid invoice, reminders, any letters before action, insolvency notices and a note of the date you decided the debt was bad and why. Keep a list of written-off debts so you recognise any later recovery as income.

Short form and Making Tax Digital

If your turnover is under £90,000, you can use the short self-employment pages. In Making Tax Digital quarterly updates, bad debts have their own category for traditional accounting businesses above the consolidated expenses threshold.

Worked example: two unpaid invoices

A photographer on traditional accounting has two unpaid invoices at the year end: £800 from a client in liquidation, and £1,200 from a client who is slow but paying in instalments. She writes off the £800 in box 27. The £1,200 is still expected and stays as income.

Four questions before a cost goes here

1. Was it for the business, and only for it? A cost must be incurred wholly and exclusively for the trade. A cost with a personal purpose that cannot be separated is not allowable at all.
2. Is part of it personal? Where a business part can be identified, such as business miles or business calls, claim that part on a reasonable basis and leave the rest out.
3. Is it a running cost or something you keep? Running costs belong in the expense categories. Things you keep are capital: an expense on the cash basis (except cars), capital allowances on traditional accounting.
4. Is there a specific rule? Some costs are disallowed whatever their purpose, such as fines and client entertaining, and some have their own treatment, such as cars, which always go through capital allowances.

Trading allowance or expenses

Instead of deducting expenses, a sole trader can claim the £1,000 trading allowance against trading income. You cannot claim both, so the allowance only helps when your allowable expenses are under £1,000. If your gross trading income is £1,000 or less, the allowance covers it and you may not need to register. Once your costs pass £1,000, deducting actual expenses gives the lower profit.

This category in Making Tax Digital

Under Making Tax Digital for Income Tax, each quarterly update carries your expenses in the same 15 categories as the full self-employment pages, so this category is one line of every update. Sole traders with qualifying income over £50,000 join from 6 April 2026, falling to £30,000 from April 2027 and £20,000 from April 2028. If your turnover is under £90,000 you can send one consolidated expenses figure instead of the categories, but you still keep the records behind it. The same £90,000 limit decides whether you can use the short self-employment pages (SA103S), which ask only for total allowable expenses.

Cash basis or traditional accounting

The cash basis, the default for sole traders and landlords since 2024/25, counts a cost in the tax year you pay it. Traditional (accruals) accounting counts it when you incur it, whenever you pay, and treats things you buy to keep as capital, relieved through capital allowances. For most costs in this category the only difference is timing; for anything you buy to keep, the basis decides whether it is an expense at all.

The disallowable column

The full self-employment pages have a second column of boxes (32 to 45) for disallowable expenses. If your accounts include something that is not allowable, such as the private share of a phone bill or client entertaining, you put the total cost in the expense box and the disallowable part in the matching box, so the tax calculation adds it back. The short pages (SA103S) simply ask for allowable expenses, so you leave the disallowable part out.

How much an allowable cost saves

Each pound of allowable expense saves a sole trader 26p at the basic rate (20% Income Tax plus 6% Class 4 National Insurance) and 42p at the higher rate, in England, Wales and Northern Ireland. Scottish Income Tax bands differ, and the sole trader tax calculator works out your own figure.

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 or receipt for every cost in this category, with a note of the business purpose wherever it is not obvious, and how you worked out the business share of anything also used privately. From 6 April 2026, sole traders and landlords with qualifying income over £50,000 keep digital records and send quarterly updates under Making Tax Digital, falling to £30,000 from April 2027 and £20,000 from April 2028.

Common mistakes

• Claiming bad debts on the cash basis.
• Writing off debts that are just late.
• Using a general provision.

Every other category

The other 14 categories on the self-employment pages, in box order:

• Cost of goods sold, SA103F box 17
• Construction industry payments to subcontractors, SA103F box 18
• Wages, salaries and other staff costs, SA103F box 19
• Car, van and travel expenses, SA103F box 20
• Rent, rates, power and insurance costs, SA103F box 21
• Repairs and maintenance of property and equipment, SA103F box 22
• Phone, stationery and other office costs, SA103F box 23
• Advertising costs, SA103F box 24
• Business entertainment, SA103F box 24, disallowed in box 39
• Interest on bank and other loans, SA103F box 25
• Bank, credit card and other financial charges, SA103F box 26
• Accountancy, legal and other professional fees, SA103F box 28
• Depreciation and loss or profit on sale of assets, SA103F box 29, disallowed in box 44
• Other business expenses, SA103F box 30

The A to Z of expenses lists every item and all 23 categories: the 15 self-employment categories and the 8 for UK property.