Last updated: 14 October 2026
Can you claim tax relief for an unpaid customer invoice?
Yes, if you’ve already included the invoice in your income. Under the accruals basis, you can deduct a bad debt in the year it becomes irrecoverable, or a specific doubtful debt when it’s reasonably estimated. Under the cash basis, which most sole traders now use, you’re only taxed on money received, so an unpaid invoice was never taxed and there’s nothing to claim. VAT can also be reclaimed through bad debt relief, after 6 months.
Cash vs accruals
| Method | Unpaid invoice |
| Cash basis | Not included in income, so no relief needed |
| Accruals basis | Included in income when invoiced; deduct when bad or specifically doubtful |
| Companies | Use accruals; can deduct specific bad and doubtful debts |
When a debt is bad
- The customer is bankrupt or in liquidation
- The customer has disappeared
- Reasonable efforts to collect have failed
General provisions, such as writing off 5% of all debtors, aren’t deductible. The provision must relate to specific debts.
Example
Tom, a self-employed builder using the accruals basis, invoiced a customer £750 in 2025/26 and included it in turnover. In 2026, he learns the customer is bankrupt. He writes off the £750 as a bad debt in his 2026/27 accounts, reducing his taxable profit by £750. If the debt is later recovered, he includes it in income when paid.
VAT bad debt relief
If you’re VAT registered and accounted for VAT on the invoice, you can claim bad debt relief when:
- the debt is more than 6 months old from the date payment was due
- you’ve written it off in your accounts
- the VAT was paid to HMRC
- the claim is made within 4 years and 6 months of the due date
Under the VAT cash accounting scheme, you don’t pay VAT until the customer pays, so no relief is needed.
Insolvency
If your customer is in administration or liquidation, submit a claim to the insolvency practitioner. You might receive a dividend from the estate, which is taxable if the debt has been written off.
Chasing debts
Interest and compensation can be claimed on late business payments under the Late Payment of Commercial Debts Act, at 8% above the Bank of England base rate.
Common mistakes
- Claiming a bad debt under the cash basis, which double counts the relief
- Writing off a general percentage of debtors
- Claiming VAT bad debt relief before the debt is 6 months overdue
- Forgetting to include a written-off debt in income when it is later paid
Records to keep
Keep the invoice, copies of reminders and chasers, any correspondence with the customer, and evidence such as an insolvency notice. These show why the debt was written off and when.
Frequently asked questions
Can I claim a debt I’ve given up chasing?
Yes, if it’s genuinely irrecoverable.
Do I need to tell HMRC?
It’s just a deduction in your accounts.
Can I deduct legal costs of chasing?
Yes, the costs of collecting trade debts are allowable.
What if I’m on the cash basis?
There’s nothing to deduct, as you weren’t taxed on it.
Related: the cash basis scheme, working out taxable profits and old sales receipts.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with bad debts and business tax. 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.
