Bad Debts: How to Handle Non-Paying Customers (And What You Can Claim Back)

Every business that extends credit to customers eventually deals with someone who simply doesn't pay. It's one of the more stressful parts of running a business, made worse by the fact that many owners don't realise there's genuine tax relief available once a debt is truly irrecoverable, or that VAT already paid over to HMRC on an unpaid invoice can, in the right circumstances, be reclaimed.

Preventing Bad Debts in the First Place

The best defence against bad debts is a solid credit control process before problems arise. Checking a new customer's credit history for larger orders, agreeing clear payment terms upfront in writing, and invoicing promptly rather than in batches all reduce the likelihood of non-payment in the first place. For larger or higher-risk orders, requiring a deposit or staged payments spreads the risk rather than leaving the full value exposed on a single invoice with extended terms.

Chasing Payment Properly

When an invoice does go overdue, a consistent, escalating follow-up process makes a real difference to how much you actually recover. A polite reminder shortly after the due date, followed by a firmer follow-up if payment still hasn't arrived, and a clear final notice before considering more formal action, tends to recover far more than either an aggressive approach too early or simply hoping the customer pays eventually without any prompting. Keeping a written record of every communication also matters, both to demonstrate you've taken reasonable steps to recover the debt and, if it comes to it, to support any formal debt recovery or legal action.

When a Debt Becomes Genuinely Bad

There's an important distinction between a slow payer and a genuine bad debt. A debt is generally treated as bad for accounting purposes once you have reasonable grounds to believe it won't be recovered - the customer has gone into liquidation, become untraceable, or formally disputed the debt without resolution despite reasonable recovery efforts. It's not enough to simply decide a debt feels unlikely to be paid; there needs to be a genuine basis for writing it off, and it's worth documenting that basis clearly at the time, rather than reconstructing the reasoning later if HMRC ever queries it.

Corporation Tax Relief on Bad Debts

Once a debt is genuinely written off as bad, it can generally be claimed as an allowable expense for Corporation Tax purposes, reducing your taxable profit by the value of the debt. This only applies to debts that were originally included in your turnover as taxable income - in other words, you can't claim relief for money you were simply hoping to earn but never actually invoiced or recognised as income in the first place.

Reclaiming VAT on Unpaid Invoices

If you're VAT registered and have already accounted for VAT on an invoice that has since gone unpaid, you may be able to reclaim that VAT through bad debt relief, provided the debt is at least six months old, has been written off in your accounts, and you've kept proper records supporting the claim. This is a genuinely valuable relief that gets overlooked more often than it should, particularly by businesses focused purely on the lost revenue itself and not thinking about the VAT they've already paid over on money they never actually received.

Knowing When to Let Go

There's often a difficult judgement call involved in deciding when to stop chasing a debt and formally write it off, particularly for a business owner who feels strongly that the money is owed and shouldn't simply be forgiven. But continuing to chase a genuinely irrecoverable debt indefinitely costs time and energy that could be better spent elsewhere in the business, and delaying the formal write-off also delays the tax and VAT relief you're entitled to claim once the debt is properly recognised as bad.

Reviewing Your Credit Control Regularly

If bad debts have become a recurring issue rather than an occasional one, it's worth stepping back and reviewing your credit control process as a whole, rather than treating each bad debt as an isolated incident. Tightening payment terms, being more selective about which customers are offered credit, and following up on overdue invoices more consistently and earlier can all meaningfully reduce how often you find yourself in this position. If you'd like help reviewing your credit control process, or claiming relief on debts you've already written off, we're happy to help.