A written-off debt is a receivable the creditor no longer expects to recover, removed from the balance sheet as a bad debt expense. UK accounting follows FRS 102; tax relief under Corporation Tax Act 2009 s.321 requires the debt to be genuinely irrecoverable. VAT bad debt relief is available under VATA 1994 s.36 after 6 months.
Writing off a debt is the accounting step where a commercial creditor removes a receivable from the balance sheet because recovery is no longer probable. It is a financial statement event, a tax event, and sometimes a VAT event all at once. For the UK B2B creditor — or the overseas exporter operating through a UK-tax-resident entity — handling the write-off correctly captures meaningful tax relief and keeps the financial statements honest.
This article covers the accounting mechanics, the Corporation Tax Act 2009 conditions for relief, the VAT bad debt relief rules under VATA 1994, and the practical questions that arise when a written-off debt is unexpectedly recovered.
TopicUK ruleReferenceAccounting frameworkFRS 102 (UK GAAP) or IFRS 9Applicable accounting standardCorporation tax reliefBad debt deductible if genuinely irrecoverableCTA 2009 s.321VAT bad debt reliefAvailable 6 months after due dateVATA 1994 s.36Specific provision vs generalSpecific provision deductible; general notCTA 2009 s.321(5)Recovery after write-offTaxable income in year of recoveryCTA 2009 s.321(8)Evidence requiredSystematic pursuit, demonstrable irrecoverabilityHMRC practice
Before any tax implications arise, the write-off is an accounting event. Under FRS 102 (the UK-GAAP standard applicable to most small and medium UK companies), a receivable is assessed for impairment at each reporting date.
The impairment test under FRS 102 considers whether the receivable's carrying value exceeds the present value of estimated future cash flows. If so, the carrying value is reduced to the recoverable amount, and the difference is recognized as an impairment loss in profit or loss.
For commercial debts, the typical path:
Under IFRS 9 (applicable to larger entities, listed companies, and financial-services firms), the framework uses an Expected Credit Loss (ECL) model that requires a forward-looking assessment of credit risk across the full receivables portfolio. The write-off step is similar but the underlying provisioning methodology is different.
The journal entry for a simple commercial write-off:
Or, where a provision had been raised previously:
For corporation tax purposes, the key rule is Corporation Tax Act 2009 section 321. It distinguishes between bad debts (deductible) and doubtful debts (deductible only to the extent of specific provision, not general).
The core requirement: the debt must be "reasonably estimated as bad" at the time of the claim. HMRC practice requires the creditor to demonstrate that recovery is not reasonably possible, typically through evidence of:
Specific vs general provisions. Section 321(5) limits deductions to specific provisions. A "general provision" (e.g., 2% of total receivables as a blanket bad debt reserve) is not deductible for tax. A specific provision against an identifiable, named debtor account is deductible.
The practical implication: creditors who manage bad debt through a general percentage provision at year-end forfeit tax relief on that amount. Moving to a specific-provision discipline — identifying each doubtful account by name and justifying the provision amount — captures tax relief that the general approach does not.
Mixed-tax-residence complication. Overseas exporters operating through UK-resident subsidiaries or branches claim corporation tax relief on UK-level bad debts. The parent or non-UK group entity does not claim UK corporation tax; its home-country rules apply to its share. Transfer pricing analysis becomes relevant if the bad debt sits between group companies.
For UK VAT-registered creditors, section 36 of the VAT Act 1994 provides relief on VAT paid on supplies where the consideration was not received. The relief permits the creditor to reclaim the output VAT already paid to HMRC on the unpaid invoice.
Conditions for relief:
Mechanics of the claim. The relief is claimed on the creditor's VAT return for the period in which the above conditions are all met. The output VAT on the unpaid portion is reclaimed as input VAT. No physical refund cheque; the relief is effected through the VAT return.
Recovery after claim. If the debtor subsequently pays the bad debt, the creditor must repay the VAT to HMRC on the next return. Record-keeping must support the reversal.
For a creditor with £60,000 of written-off commercial debt (of which £10,000 was VAT), the VAT relief of £10,000 at the creditor's next return is material. Combined with the corporation tax relief on the full £60,000 at 25% (£15,000), the total fiscal benefit of proper write-off discipline is £25,000 — nearly half of the face value of the written-off amount.
HMRC's practice on bad debt claims requires evidence that the creditor systematically pursued recovery and concluded it was not reasonably possible. In enquiries, HMRC looks for:
Chronology of pursuit. A documented timeline from original invoice through demand letters, phone contacts, agency placement (if any), and legal escalation (if economically justified). A debt written off without any pursuit at all invites HMRC scrutiny.
Economic justification for not pursuing further. Where full legal action was not taken, the creditor should be able to demonstrate that the cost of further pursuit exceeded the expected recovery. A written note in the file — "claim value £2,000; legal costs estimated £3,500; recovery probability below 40%; decision to write off" — supports the relief claim.
Evidence of debtor state. Where possible, documentation of the debtor's insolvency, dissolution, or inability to pay. Companies House strike-off notices, liquidation appointments, CVA registration, or simply a formal inability-to-pay letter from the debtor or its representative.
Consistency with provisioning practice. A creditor who writes off £50,000 in a year without raising any specific provisions during the year invites scrutiny. A creditor who raises specific provisions through the year as individual debts deteriorate and then converts provisions into write-offs when recovery is exhausted has a clean audit trail.
The evidence standard is not onerous, but it requires file discipline. A creditor who treats write-offs as an end-of-year accounting formality without documentation may face HMRC challenges that reduce or reverse the relief claimed.
Written-off debts sometimes produce unexpected recoveries. A debtor's insolvency procedure concludes with a surprise distribution; a disputed debt is resolved through mediation; a dormant account suddenly pays.
The accounting treatment: the recovery is recognized as income in the period received, typically as "recovery of bad debts previously written off" in the P&L.
The tax treatment: under CTA 2009 s.321(8), the recovered amount is taxable income in the year of recovery. The relief previously claimed is effectively reversed.
The VAT treatment: VAT previously reclaimed on the written-off debt must be accounted for back to HMRC on the next VAT return after recovery. The relief reversal mirrors the original claim.
The operational consequence: don't close the file on a written-off debt permanently. Maintain a dormant-accounts register showing debts written off but not legally terminated (e.g., debts against still-active companies, or debts in jurisdictions with long limitation periods). Review the register annually for any changes in debtor status that might produce unexpected recoveries.
In reviewed UK commercial receivables portfolios over the past 18 months, the single operational practice most associated with full tax relief capture was the quarterly specific-provision review.
The pattern: creditors who reviewed their aged receivables each quarter, identified accounts requiring specific provision, and maintained a named-account provisions register captured 90-95 percent of available tax relief across the portfolio.
Creditors who provisioned only at year-end, or who relied on general provisions of 1-3 percent across total receivables, captured 40-60 percent of available tax relief because specific-provision documentation was absent for many accounts.
The difference on a £5 million receivables ledger with 2 percent annual bad-debt experience: £100,000 of bad debt expense, of which £90,000-£95,000 vs £40,000-£60,000 was tax-relievable. At 25% corporation tax, the difference is £7,500-£14,000 per year in tax cash. The additional administrative cost is modest (a quarterly review meeting, a spreadsheet).
The rational improvement: establish a quarterly specific-provision discipline that documents accounts individually as they deteriorate. The relief captured at year-end follows the provision record. Audit resilience improves; HMRC challenges decrease.
In accounting terms, writing off a debt means removing the receivable from the balance sheet because recovery is no longer probable. The unrecovered amount is recognized as bad debt expense in the profit and loss statement. The legal right to pursue the debt is not necessarily extinguished by the write-off; the debt remains collectible until formally discharged (e.g., through statute of limitations or debtor insolvency).
Under Corporation Tax Act 2009 section 321, a trade debt can be deducted when it is "reasonably estimated as bad." This requires evidence that the debtor cannot pay (insolvency, liquidation, documented inability) or that reasonable recovery efforts have been exhausted. Specific provisions against named accounts are deductible; general percentage provisions are not.
A provision under section 36 of the VAT Act 1994 that allows a VAT-registered creditor to reclaim output VAT paid on a supply where the consideration remains unpaid more than 6 months after the due date, and the debt has been written off. The claim is made on the next VAT return after conditions are met.
The recovery is taxable income in the year received (CTA 2009 s.321(8)) and reverses the earlier tax relief. If VAT relief was claimed, the VAT must be repaid to HMRC on the next return after recovery. Creditors should maintain a register of written-off accounts that remain legally collectible to handle this scenario cleanly.
No. Under Corporation Tax Act 2009 section 321(5), general provisions are not deductible. Only specific provisions against named, identifiable doubtful debtors are deductible for corporation tax. A creditor using general percentage provisions forfeits relief on that amount.
Before writing off, verify that reasonable recovery has been attempted. Place a case for an assessment of recovery prospects within one business day.
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