Q. In the wake of COVID-19 pandemic, I have been reviewing my books in an effort to more accurately review unpaid sales invoices. I have identified a relatively high number of these from the end of 2021, as may be expected in the circumstances. Am I right in thinking I have to wait six months before I can write these off for tax purposes?
A: The six-month statutory time limit actually applies to VAT, rather than income tax. There is no minimum time you need to wait before you can write off a debt for tax purposes in theory. However, HMRC does require reasonable steps to have been taken in order to recover payment before you do so. It is not sufficient to make a provision for bad debts, as it is under accounting rules. In practice, you need to identify debts that are unlikely to be paid on a case-by-case basis.
For smaller debts, HMRC is likely to accept a couple of reminders to demonstrate that you have made an effort to recover the monies owed to you. For larger debts, it’s more likely that more formal action would be needed in order to secure the deduction, e.g. appointing a debt collection service, or applying to a court to assist with recovery. There are no hard and fast rules, although HMRC is likely to accept a claim for bad debt relief if you have evidence that a debtor is in administration, or subject to insolvency proceedings. HMRC’s guidance in the business income manual is a helpful reference.