You invoiced a client. They never paid. You chased them three times, and now their phone goes straight to voicemail. It happens to almost every business at some point. And when it happens, most limited company directors are left wondering: what do I actually do with this in my accounts?
The short answer is, you write it off as bad debt.
But the longer answer includes how you record it, and whether you can claim tax relief, and also what are the HMRC rules for bad debt relief.
This guide covers bad debt accounting limited company UK rules for the 2026/27 tax year, including:
- Can I claim tax relief on bad debts?
- How do I write off a bad debt in my accounts?
- What are the HMRC rules for bad debt relief?
- And much more…
Let’s get into it!
What Is a Bad Debt in Accounting?
A bad debt is money you are owed, but you have little realistic prospect of recovery or getting paid. This typically happens when a customer goes bankrupt or defaults on payment. You must recognise this in your financial records.
You cannot just leave it sitting on your balance sheet. This is because, without this adjustment, your profits can look higher than they really are. As a result, you might end up paying more Corporation Tax than necessary. But if you get your head around bad debt accounting limited company UK principles, it can help you prevent this.
In short, when a debt turns bad, the business must record it. This is in order to ensure its financial statements reflect reality. And once you reach this point, you must know the rules for bad debt accounting limited company UK businesses must follow.
Important: If a client is just late or disputing a small detail, it is not a bad debt yet.
Bad Debts vs Doubtful Debts
People often mix these two different concepts. Yes, they are related, but they are not identical. A proper bad debt accounting limited company UK requires knowing the difference.
| Type | Meaning |
| Bad Debt | The money is almost certainly unrecoverable |
| Doubtful Debt | There is uncertainty about payment |
For example:
- A customer who vanished 18 months ago might be a bad debt
- A client who is late but still communicating may simply be doubtful
How Do I Write Off a Bad Debt in My Accounts?
So once you have identified a bad debt, writing off a bad debt involves two accounting entries. Though it is not complicated, it definitely needs to be done properly. It is basically the core part of bad debt accounting limited company UK.
Under FRS 102 and FRS 105, which apply to most UK limited companies, the correct term is actually an impairment loss rather than a “bad debt provision”. It is worth knowing this distinction because the rules are stricter than many people assume.
Step 1: Recognise an impairment loss
You can only do this when there is objective evidence that the debt will not be recovered. If you just have a general feeling that a customer might not pay, it is not enough. Objective evidence here means something concrete. This could include persistent non-payment despite repeated chasing. Or confirmed knowledge that they are in serious financial difficulty.
You also need to remember that FRS 102 and FRS 105 do not permit general provisions like “5% of all debtors”. Every impairment must relate to a specifically identified debt with a clear reason behind it.
Step 2: Write it off
Once you are certain the debt is irrecoverable, you write it off fully. This removes it from your balance sheet. This removes the debt from the balance sheet and records the loss in your profit and loss account.
Here is a simple example of bad debt accounting limited company UK entries:
| Action | Debit | Credit |
| Recognise impairment loss | Bad Debt Expense £1,500 | Impairment Allowance £1,500 |
| Write off the debt | Impairment Allowance £1,500 | Trade Debtors £1,500 |
Your profit and loss account will show the bad debt expense. This reduces your taxable profit. And that is exactly where the tax relief comes in.
Can I Claim Tax Relief on Bad Debts?
Yes, you can absolutely claim tax relief on bad debts in the UK. But HMRC divides this relief into two completely separate parts:
- Corporation Tax Relief, and
- VAT Bad Debt Relief
Because UK limited companies must use standard accrual accounting, you cannot rely on cash basis rules to handle unpaid invoices. Instead, you must satisfy specific criteria to claim relief. This makes standard bad debt accounting limited company UK setups a bit more technical.
What Are the HMRC Rules for Bad Debt Relief?
Corporation Tax is only half of the story. You also need to consider Value Added Tax if your business is VAT registered.
The key rules for bad debt accounting limited company UK are as follows:
1. Rules for Corporation Tax
When you execute the journal entries previously discussed, the Bad Debt Expense hits your Profit & Loss (P&L) account. This lowers your net profit. As a result, it directly reduces your final Corporation Tax bill.
However, HMRC enforces strict rules regarding when this expense is legally tax-deductible:
- Remember that you can only claim tax relief on specific invoices. This means you must have a clear and documented reason to believe that a particular customer cannot pay.
- As discussed, you cannot arbitrarily declare a flat 5% or 10% of your total year-end debtors as “doubtful” just to reduce your tax bill. HMRC will disallow general provisions. And they will add them back to your taxable profit.
- The relief must be claimed in the exact accounting period during which the debt genuinely became uncollectible.
This means if you want to manage bad debt accounting for a UK limited company, you must keep a tight paper trail for these exact scenarios.
2. Rules for VAT Bad Debt Relief
If you are VAT-registered, you likely already paid the 20% VAT to HMRC when you initially filed the original invoice. If the customer defaults, you can reclaim that exact VAT amount on your next VAT return. But this can only happen when you meet all four of these statutory conditions:
- The debt must be at least 6 months overdue from the later of the invoice date or the payment due date.
- You must have already accounted for the VAT and paid it to HMRC on a prior return.
- The invoice must be formally moved to a bad debt account via the journal entries we established.
- You generally cannot claim VAT bad debt relief on debts that have been legally assigned or sold to another party.
Quick Summary of HMRC Rules
| Rule Requirement | What You Must Do |
| Specificity | Identify exact invoices and customer names. General provisions do not count for tax relief under the bad debt accounting limited company UK guidelines. |
| Effort | You must keep evidence of emails, letters, or legal steps showing you tried to collect. |
| VAT Adjustments | Ensure the debt is older than 6 months before reclaiming the VAT element. |
When Can HMRC Refuse Bad Debt Relief?
HMRC may reject relief if:
- The debt was not genuine
- Records are missing
- The customer was connected improperly
- The debt was never included in income
- There was no real attempt to recover payment
Other than that, HMRC may deny relief where the debt arises from non-commercial arrangements between connected parties. For example, directors sometimes try writing off informal loans to friends or related businesses as bad debts. HMRC looks closely at those situations, especially between connected companies. If your records are messy, you will fail the strict audit checks for bad debt accounting limited company UK relief.
Why Accrual Accounting Makes Bad Debt Relief Essential
Because UK limited companies are legally required to use standard accrual accounting, you record sales when the work is completed, or goods are delivered, regardless of when the cash is received. You do not wait for the cash to hit your bank account. This means you might owe Corporation Tax on a sale you made months ago, even if the client has not paid you a single penny yet.
This is why bad debt accounting limited company UK procedures are so important to understand. If an invoice goes bad under accrual rules, your accounts will show artificial profits. You will end up paying tax on money that does not exist unless you adjust your books. Thus, managing bad debt accounting for a UK limited company effectively stops you from overpaying the tax.
What Happens If a Customer Pays After You Have Written Off the Debt?
Well, it does happen. You write off a debt, and six months later, a cheque arrives. In this case, you simply reverse the write-off. The recovery is treated as income in the year it is received. For VAT purposes, if you have already reclaimed the VAT under bad debt relief, you will need to repay it to HMRC. This is a standard correction routine in bad debt accounting limited company UK procedures.
Bad Debt Accounting Limited Company UK in Xero, QuickBooks, and FreeAgent
Most cloud accounting software includes bad debt write-off functions. Usually, the process involves:
- Opening the unpaid invoice
- Creating a credit note or write-off
- Posting to a bad debt expense account
- Adjusting VAT correctly
The steps differ slightly across platforms. But the accounting principle remains the same.
Practical Tips for Managing Bad Debts
Preventing bad debts is much better for your cash flow than writing them off later. Here is how to protect your business:
- Check Credit First: You must run background checks on Companies House before offering credit terms to new clients.
- Set Clear Deadlines: Remember to print an exact due date on every invoice rather than using vague terms like “payment on receipt”.
- Automate Reminders: Use your accounting software to automatically email clients. This should be done before and after an invoice becomes overdue. This will help you with day-to-day bad debt accounting limited company UK management.
- Call Early: Pick up the phone within seven days of a missed deadline to secure a firm payment commitment.
- Offer Payment Plans: You can also secure small weekly instalments if a customer admits they are facing a cash flow crisis.
The Bottom Line
Bad debt is an unfortunate reality for most businesses. It’s also a fact that no invoice is completely risk-free. However, managing the process of bad debt accounting limited company UK regulations ensures that a bad situation does not get worse.
If you want to protect your cash flow, you must keep tight records and track your timelines. You should also not forget to claim your VAT back correctly.
Plus, it’s essential to discuss any potential bad debts with your accountant.
How Accotax Can Help
If you need help with bad debt accounting or any other accounting service, such as bookkeeping, VAT, or year-end accounts, visit Accotax. We offer a range of packages designed to fit your unique needs!
Reach out, get an instant quote, and let us help you stay compliant!
Disclaimer: All the information provided in this article on “How to Account for Bad Debt Accounting Limited Company UK?” including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.
