Writing off a debt in the books

Q: What is the tax treatment of write offs and recoveries?

Sole traders and partnerships: section 35 of the Income Tax (Trading and Other Income) Act 2005 allows a deduction only for a debt that is bad, estimated to be bad, or released as part of a statutory insolvency arrangement. BIM42730 says that where a deduction has been made and the debt is later recovered, the amount recovered is brought into credit in the year of recovery. After the trade has stopped: BIM42745 treats recoveries, to the extent a deduction was allowed, as post cessation receipts. See post cessation receipts and expenses. Companies: HMRC's Corporate Finance Manual at CFM41030 says impairment losses on unpaid trade debts, and any credit when an impairment is reversed, are dealt with under the loan relationship rules. Cash basis: BIM72030 notes that a business on the cash basis does not need to account for bad and doubtful debts, because unpaid invoices were never income. See cash basis vs accruals accounting.

Q: What mistakes come up most often?

Claiming VAT relief too early, before six months from the later of the due date and supply date. No separate bad debt account, so the claim cannot be evidenced. Forgetting the box 1 repayment when a liquidator's dividend or late payment arrives. Ignoring money owed to the same customer. VAT Notice 700/18 paragraph 3.7 reduces the debt by any amount the business owes the debtor and can set off; see contra entries. Writing off and stopping collection. A write off is an accounting judgement; it does not release the customer, and credit control can continue. Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

To write off a debt, debit an irrecoverable (bad) debts expense account and credit trade debtors, posting the credit to both the customer’s account and the sales ledger control account. If the money later arrives, debit bank and credit bad debts expense or a bad debts recovered account; sales are not reinstated. VAT bad debt relief is a separate set of entries: once the debt is six months overdue and written off, the VAT is reclaimed in box 4, and any VAT on a later recovery is repaid in box 1.

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When should a debt be written off rather than provided for?

A write off removes the balance from the sales ledger because the business no longer expects to collect it, for example after the customer’s liquidation. Where collection is doubtful but still being pursued, an allowance reduces the reported value of debtors without removing the customer balance. The judgement of which applies is covered on our pages on bad debts: accounting, tax and VAT relief and impairment of debtors. This page is about the entries once the decision is made.

Timing still counts for tax. HMRC’s Business Income Manual at BIM42701 says the deduction for a bad or doubtful debt is made in the year in which the debt becomes bad or doubtful, so the write off should be posted in the period the evidence arose, not whenever someone tidies the aged debtors list.

What are the entries for a write off?

ACCA’s technical article on trade receivables sets out the general ledger entry: debit irrecoverable debts, credit trade receivables. The expense may be called bad debts, irrecoverable debts or receivables expense. In a business with a sales ledger:

Where	Debit	Credit
General ledger	Irrecoverable debts expense	Sales ledger control account
Sales ledger		Customer’s account

The write off is for the full amount owed, including VAT, because that is the balance in the ledger. The customer account should show a write off transaction, not a credit note. A credit note says the sale was reduced, which understates turnover and confuses the VAT records. Posting the journal to the control account without allocating it to the customer is the classic cause of a control account difference.

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How is VAT bad debt relief recorded?

The VAT on the original invoice was paid to HMRC when the sale was made. VAT Notice 700/18 lets the business reclaim it once these conditions are met:

the VAT has already been accounted for and paid;
the debt has been written off in the day to day VAT accounts and transferred to a separate bad debt account;
the value of the supply is not more than the customary selling price;
the debt has not been paid, sold or factored under a valid legal assignment; and
it has remained unpaid for six months after the later of the date payment was due and the date of supply.

The claim goes in box 4 of the VAT return covering the date the conditions are met, and must be made within four years and six months of the later of those two dates. The separate bad debt account must show, among other things, the amount written off, the VAT claimed and the return it was claimed on, the VAT originally charged, payments received, the customer’s name and the invoice date and number. The notice requires these records to be kept for four years from the date of the claim.

In the books, the claim is a further journal: debit VAT control account (reducing the liability), credit irrecoverable debts expense. The net cost of the bad debt is then the amount excluding VAT.

What does a worked example look like?

Illustration only. On 31 January a business invoices £1,200 (£1,000 plus £200 VAT), payable in 30 days. The customer enters administration in May and the debt is written off.

Date	Entry	Debit	Credit
31 January	Sale	Debtors 1,200	Sales 1,000; VAT 200
May	Write off	Irrecoverable debts 1,200	Debtors 1,200
Return covering 2 September	VAT relief (box 4)	VAT control 200	Irrecoverable debts 200
Following year	Dividend of £600 from administrator	Bank 600	Bad debts recovered 600
Same period	VAT repaid (box 1)	Bad debts recovered 100	VAT control 100

Payment was due on 2 March, so the six months ran to 2 September. The VAT to repay follows paragraph 3.15 of the notice: claim multiplied by payment received, divided by the amount outstanding when the claim was made, so £200 × £600 ÷ £1,200 = £100. Paragraph 3.14 requires the repayment in box 1 of the return for the period the payment is received, and the receipt must be shown in the separate bad debt account. The net recovery in profit is £500.

How is a recovery recorded?

ACCA’s article deals with a debt written off in one year and paid in the next. Because the debt has already been removed from trade receivables, the receipt is recorded as debit bank, credit irrecoverable debts, and ACCA notes it is equally acceptable to use a separate irrecoverable debts recovered account so that the year’s write offs are not obscured. Revenue is not adjusted, because the sale was recognised when it was made.

Some businesses prefer to reinstate the debt first (debit debtors, credit bad debts recovered) and then post the receipt against the customer account, so that the customer’s history shows the payment. The effect on profit is the same. Either way, check whether VAT relief was claimed, because any VAT element of the receipt must go back to HMRC.

How does an allowance for doubtful debts fit in?

An allowance is kept in its own account and credited against debtors in the balance sheet. ACCA’s article explains that only the movement goes to profit each year: the opening allowance is reversed and the closing allowance put in, with the other side of each entry in the irrecoverable debts account. If a debt covered by last year’s allowance is written off this year, the write off is charged in full and the release of the old allowance offsets it, so the debt is not charged twice.

What is the tax treatment of write offs and recoveries?

Sole traders and partnerships: section 35 of the Income Tax (Trading and Other Income) Act 2005 allows a deduction only for a debt that is bad, estimated to be bad, or released as part of a statutory insolvency arrangement. BIM42730 says that where a deduction has been made and the debt is later recovered, the amount recovered is brought into credit in the year of recovery.
After the trade has stopped: BIM42745 treats recoveries, to the extent a deduction was allowed, as post cessation receipts. See post cessation receipts and expenses.
Companies: HMRC’s Corporate Finance Manual at CFM41030 says impairment losses on unpaid trade debts, and any credit when an impairment is reversed, are dealt with under the loan relationship rules.
Cash basis: BIM72030 notes that a business on the cash basis does not need to account for bad and doubtful debts, because unpaid invoices were never income. See cash basis vs accruals accounting.

What mistakes come up most often?

Claiming VAT relief too early, before six months from the later of the due date and supply date.
No separate bad debt account, so the claim cannot be evidenced.
Forgetting the box 1 repayment when a liquidator’s dividend or late payment arrives.
Ignoring money owed to the same customer. VAT Notice 700/18 paragraph 3.7 reduces the debt by any amount the business owes the debtor and can set off; see contra entries.
Writing off and stopping collection. A write off is an accounting judgement; it does not release the customer, and credit control can continue.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.