What is Bad Debt?

A bad debt is money owed to your business that you have been unable to collect and have concluded will never be paid. Writing off a bad debt means accepting the loss and removing the amount from your accounts receivable.

When a debt becomes "bad": There is no fixed legal threshold, but debts are typically considered bad when: - The customer has gone insolvent or been dissolved - You have exhausted all reasonable collection efforts (letters, calls, final demands) - The debt is very old (typically 6+ months with no response) - The cost of recovery exceeds the debt value - The customer disputes the debt and you cannot resolve it

Tax treatment in the UK: - You can claim bad debt relief on VAT if the debt is over 6 months old, you have already paid the VAT to HMRC, and the debt has been written off in your accounts - Bad debts are an allowable expense for income tax or corporation tax purposes - You must keep evidence of your efforts to collect the debt

Preventing bad debts: - Run credit checks on new clients before extending payment terms - Require deposits or stage payments for large projects - Send invoices promptly and chase consistently - Set credit limits for each customer - Act quickly when invoices become overdue — the older a debt gets, the harder it is to collect

Doubtful debts vs bad debts: A doubtful debt is one you suspect may not be paid but have not yet given up on. You can make a provision for doubtful debts in your accounts. A bad debt is one you have formally written off.