Last updated: 14 October 2026
Should you adjust your accounts for unpaid fees?
If you use the accruals basis, you include invoices in income when the work is done, even if the client hasn’t paid. If a debt becomes doubtful or irrecoverable, you can write it off or make a specific provision, and that reduces taxable profit. General provisions, such as writing off 5% of all debtors, aren’t allowed for tax. If you use the cash basis, which is now the default for sole traders, unpaid fees aren’t income until they’re received, so no adjustment is needed for bad debts.
Accruals versus cash basis
| Situation | Accruals basis | Cash basis |
| Invoice issued, unpaid at year end | Income | Not income yet |
| Client goes bust; debt irrecoverable | Write off: deductible | Never income; nothing to deduct |
| Specific provision for a doubtful debt | Deductible | n/a |
| General provision (% of all debtors) | Not deductible | n/a |
| Debt later paid after write-off | Taxable when recovered | Taxable when received |
What counts as a specific provision
A specific provision must relate to identified debts that you have good reason to think won’t be paid, for example:
- The client has entered administration
- The client disputes the fee and refuses to pay
- Several reminders have been ignored for months
- A debt collector has advised the debt is uncollectable
Example
Ella, an architect using the accruals basis, has £48,000 of unpaid invoices at 31 March 2027. One client, owing £6,000, has gone into liquidation. Another, owing £3,000, is 8 months overdue and not responding. She writes off £6,000 and makes a specific provision for £3,000. Her taxable profit falls by £9,000. A general 5% provision on the remaining debts wouldn’t be deductible.
Losses and unpaid fees
If unpaid fees turn a profit into a loss, a trading loss can be set against your other income or carried forward. Using the cash basis can create losses more easily, subject to loss relief restrictions.
VAT bad debt relief
If you account for VAT on the invoice basis, you can reclaim VAT on a bad debt once it’s more than 6 months overdue and written off in your records. Under cash accounting, VAT isn’t due until payment, so no claim is needed.
Companies
Companies must use the accruals basis. The same rules on specific provisions apply for corporation tax.
Common mistakes
- Deducting a general provision
- Forgetting to tax a recovered bad debt
- Not claiming VAT bad debt relief
- Writing off a debt without evidence
Records to keep
Keep copies of invoices, chasing letters, emails and any insolvency notices. These support the provision if HMRC asks.
Work in progress
Under the accruals basis, work done but not yet invoiced at the year end is also income, valued at cost or a share of the expected fee. If a project is in dispute and you may never be paid, the value of that work in progress can be reduced in the same way as a doubtful debt.
Frequently asked questions
Can I write off a debt from a relative?
Yes, if it’s genuinely irrecoverable.
Should I switch to the cash basis?
It can simplify things for smaller businesses.
Do I need to report bad debts separately?
No, they’re part of your accounts.
How long before I can write it off?
When it’s reasonably certain not to be paid.
Related: working out taxable profits, revenue from a new consulting business and personal bank account transactions.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with bad debts and accounts. See our sole trader accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
