Bad debt corporation tax UK – How to treat bad debts

14 September 2026

Bad debt corporation tax UK is a common concern for limited companies that sell on credit. Knowing when a debt can be written off for tax purposes and how to document the decision can protect your taxable profits and reduce the risk of an HMRC adjustment.

This guide explains the practical and tax steps for writing off bad debts, what counts as tax deductible bad debts, and why a general doubtful debt provision is usually not allowable for corporation tax.

When is a trade debt allowable for corporation tax?

A business can only deduct a bad debt for corporation tax if the debt was previously included in taxable income and it has genuinely become irrecoverable. The key principle is that the tax system follows the accounts – what you include in profit and loss can be adjusted for tax when circumstances change.

Short paragraphs help make the rules clear:

The debt must arise from trading activity or be a commercial receivable shown in the company accounts.
You must have taken reasonable steps to recover the debt, and it must be specifically written off in the company accounts for the accounting period in which you claim the deduction.
A general provision for doubtful debts is normally not tax deductible. Only specific write-offs are accepted by HMRC as tax deductible bad debts.

How to decide a debt is irrecoverable

You should be able to show objective evidence that a debt is irrecoverable. HMRC will look for a clear paper trail before allowing a deduction.

Steps that support a write-off include:

Sending formal reminder letters and credit control records.
Records of phone calls, emails, and attempted recovery actions.
Evidence of insolvency of the debtor – for example, a Companies House insolvency filing, bankruptcy notices, or a final dividend report from a liquidator.
A period of inactivity on the account combined with a reasonable expectancy test that recovery is no longer realistic.

If you can show these actions, the company can write the debtor off in the accounts and claim the loss against corporation tax.

Specific write-offs vs doubtful debt provision

Understanding the difference between a specific write-off and a doubtful debt provision is essential for tax purposes.

A specific write-off is when you identify a particular customer balance as irrecoverable and remove it from the receivables ledger.
A doubtful debt provision is a general estimate of future bad debts across the ledger – it is an accounting reserve rather than a specific identification.

For corporation tax purposes, HMRC generally does not accept general provisions as deductible. Only specific bad debts that are written off in the accounts are treated as tax deductible bad debts.

Example:

If you estimate 2% of receivables may be uncollectible and create a provision, that provision will not be deductible for corporation tax.
When a specific invoice is later written off and removed from the ledger, the actual write-off is deductible even if you previously increased a provision.

Accounting and tax timing – when to claim the deduction

Corporation tax follows the company accounts prepared under the Companies Act. The tax deduction is normally claimed in the accounting period in which the debt is written off.

Points to note:

If the write-off appears in the statutory accounts for a year, include the deduction in the tax return for that period.
If you discover a debt is irrecoverable after the accounts are filed, you may need to amend prior period tax computations where appropriate.
Any subsequent recovery of a previously written-off debt must be added back to taxable profits in the year recovered.

How to show a bad debt in your accounts and tax computation

Practical steps when dealing with a bad debt:

Enter the specific write-off in the ledger and make sure the receivable is zeroed.
Keep a note on the customer account summarising recovery attempts and reason for write-off.
Reflect the write-off in your profit and loss as an expense and in your tax computation as an allowable deduction, where appropriate.
If you use accounting software like Xero, mark the invoice as written off and keep attachment evidence. For bookkeeping help see Bookkeeping & Xero.

In the company tax return (CT600) you include the accounts profit or loss and then adjust for non-deductible items. Specific bad debts will normally require no further adjustment if they have been charged in the statutory accounts, but you should document the basis for the deduction in the tax computations that support the return.

VAT and bad debt relief

VAT treatment is separate from corporation tax. If you wrote VAT to HMRC on a sale and later write off the underlying debt, you may be able to claim VAT bad debt relief from HMRC.

Key points:

VAT bad debt relief lets you reclaim VAT on invoices that remain unpaid after a specified period and are written off.
To claim, you must normally have issued the VAT invoice and accounted for the VAT on your VAT return.
There are time limits and conditions. See HMRC guidance on VAT bad debt relief: https://www.gov.uk/guidance/vat-bad-debt-relief

Because VAT and corporation tax have different rules, always claim VAT relief separately and keep the VAT evidence alongside your tax documentation.

Director loans, related parties and connected parties

Not all write-offs are straightforward. Loans to directors or distributions disguised as write-offs carry specific rules and tax traps.

Loans to participators or directors are subject to the s455 charge if not repaid – this is a corporation tax charge on loans to participators and does not equate to a simple deductible loss.
Writing off a loan to a director may be treated as a distribution rather than a trading loss, which can have additional tax consequences for the director.
Write-offs involving connected parties attract greater HMRC scrutiny. Ensure robust commercial reasons support the decision to write off these balances.

If you are considering writing off a related party debt, take professional advice to avoid creating an unexpected tax charge or contravening distribution rules.

Loan relationships, finance costs and insolvency situations

Different tax rules can apply to loans, intra-group financing and interest receivables.

For loan relationships, the tax treatment follows specific loan relationship rules rather than simple trading debt rules.
If the debt involves accrued interest, you need to separate the capital element and interest element. Interest may have different tax treatment when written off.
In an insolvency scenario, proof of insolvency such as a bankruptcy or liquidation report supports the write-off. HMRC generally accepts insolvency evidence as strong support.

Consult your accountant if the debt arises from loan finance rather than normal trade receivables.

Evidence HMRC will expect

Keep thorough evidence to support the tax deduction. HMRC will expect a clear audit trail.

Keep the following documents:

Copies of invoices and contract or sales terms.
Credit control history – reminders, emails, phone notes and final demand letters.
Legal correspondence and solicitor reports if you instructed recovery action.
Insolvency documents where applicable – Companies House filings, liquidator reports, bankruptcy notifications.
Board minutes or management files evidencing the commercial decision to write off.

Good documentation reduces the risk of HMRC disallowing a deduction and makes any future recovery straightforward to treat in the tax accounts.

Practical examples and worked numbers

Example 1 – small trade receivable

Company A sold goods worth Â£10,000 and included the sale in accounts and tax in year 1.
The customer becomes insolvent in year 2 and Company A writes off the Â£10,000 in year 2 accounts.
Company A can claim the Â£10,000 as a deduction in its corporation tax computation for year 2, provided it can evidence insolvency and recovery efforts.

Example 2 – doubtful debt provision then specific write-off

Company B creates a 5% doubtful debt provision across receivables in year 1. The provision is not deductible for corporation tax.
In year 2 a particular customer invoice of Â£5,000 is written off specifically. That write-off is deductible in year 2 even though a provision existed previously.

Example 3 – partial recovery after write-off

Company C writes off a Â£4,000 invoice and claims the deduction in year 3.
In year 5 the company unexpectedly receives Â£1,000 from the debtor.
Company C must include the Â£1,000 as income in the taxable profits for year 5.

Common mistakes to avoid

Avoid these frequent errors when dealing with bad debts:

Claiming a tax deduction for a general doubtful debt provision.
Failing to record the write-off in the statutory accounts before claiming the deduction.
Ignoring VAT bad debt relief rules when VAT was charged on the original invoice.
Writing off related party balances without considering distribution and s455 implications.
Lacking recovery evidence and correspondence to justify the write-off to HMRC.

How Figures can help

If you are unsure whether a debt is tax deductible, we can help you document the case and prepare the correct corporation tax treatment.

We provide end-to-end support from bookkeeping and invoice control to preparing statutory accounts and the tax computations that support claims. See Bookkeeping & Xero and Statutory Accounts & Tax.
For complex scenarios such as director loans, intra-group write-offs or loan relationship issues we can advise on the tax consequences and help manage the HMRC position.

UK tax and legal accuracy

This article is for informational purposes only and does not constitute professional tax or financial advice. Please speak to a qualified accountant before taking action. Relevant tax year: 2026/27.

Frequently asked questions

What counts as a tax deductible bad debt for corporation tax?

A tax deductible bad debt is a specific debtor balance that was previously included in taxable income and is now objectively irrecoverable. You must write it off in the company accounts and retain evidence of recovery attempts.

Is a doubtful debt provision tax deductible?

No. A general doubtful debt provision is usually not tax deductible. Only specific write-offs of identified debts are accepted by HMRC as tax deductible bad debts.

Can I reclaim VAT on a written-off invoice?

Possibly. You may be able to claim VAT bad debt relief if you accounted for the VAT and meet the time and evidence conditions. See HMRC guidance on VAT bad debt relief: https://www.gov.uk/guidance/vat-bad-debt-relief

What should I do if a director loan becomes irrecoverable?

Loans to directors and participators can trigger different tax consequences, including a s455 corporation tax charge. Do not assume a straight deductible loss – get specialist advice before writing off director loans.

What happens if I recover a debt after writing it off?

Any amount recovered after a write-off must be included as taxable income in the period when the recovery occurs.

Summary and next steps

Bad debt corporation tax UK rules reward clear documentation and specific write-offs. Remember that general doubtful debt provisions are normally not deductible, and VAT relief has separate conditions.

If you need help identifying which debts can be written off, preparing the paperwork, or ensuring the tax treatment is correct, speak to Figures. Book a discovery call with our team to review your aged debtor list and tax position – book a discovery call. We can also help with ongoing bookkeeping and statutory accounts to make future claims straightforward.