Bad and Doubtful Debts: What HMRC Expects and Why Timing Matters

There’s a well-known saying in finance:

“When you owe the bank £1,000 and can’t pay, it’s your problem. But if you owe the bank £1 million and can’t pay, it’s the bank’s problem.”

This quote highlights the complexity of debt management and the varying impact it can have, depending on the scale. But whether your business is chasing small invoices or dealing with six-figure unpaid balances, bad debts and doubtful debts can have major tax implications.

This article examines how businesses should account for bad and doubtful debts, what HMRC expects, the importance of timing, and how the recent Accelerate Corporation Ltd v HMRC [2025] case offers valuable lessons.

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What Are “Bad” and “Doubtful” Debts?

At its core, a bad debt is money you are owed but now have no realistic chance of recovering. For example, your customer may have gone bankrupt, been liquidated, or simply ceased to exist.

A doubtful debt, on the other hand, is an amount that might not be recoverable. There is still hope, but it’s not guaranteed. Perhaps the client is in financial difficulty, you’ve had no response, or they’ve made partial payments but the rest remains unpaid long after the due date.

These are not just accounting labels—they affect when and how you can claim a tax deduction for unpaid income.

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Terminology Clarification: “Provision” vs “Impairment”

While many accountants and business owners refer to making a “provision” for bad debts, technically speaking:

• You don’t provide for the reduction of an asset like a receivable; you impair it.
• You can’t provide for a bad debt—it’s either bad (and written off) or not.
• A provision is more accurately used for a doubtful debt—where recovery is uncertain, but still possible.

That said, the common use of “provision for bad and doubtful debts” is widely understood in practice and appears in many accounting systems.

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Why It Matters for Tax

You should never pay tax on income you’ll never receive—but you also can’t just assume a debt is unrecoverable. HMRC requires proof, especially if you’re claiming a deduction for the loss in your accounts.

Under UK tax law:

• Taxable profit is based on accounting profit, calculated using Generally Accepted Accounting Practice (GAAP).
• GAAP requires an impairment review of debts—especially for larger or long-standing ones.
• For tax purposes, relief is only allowed to the extent the debt is actually bad, or you can reasonably estimate it is bad (Income Tax Act 2005, s.35; or Corporation Tax Act for companies).

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General vs Specific Provisions – The HMRC View

❌ General Provisions

Let’s say you have £100,000 in outstanding receivables and decide to make a 10% provision across the board “just in case.” While this may be fine under GAAP for accounting purposes, HMRC will disallow this provision for tax purposes unless:

• You can justify the 10%, based on actual trends, recovery rates, or supporting data;
• Or you undertake a debt-by-debt review, estimating expected recovery from each debtor.

See HMRC’s Business Income Manual at BIM42701.

✅ Specific Provisions

These are far more acceptable—especially when backed by clear evidence.

You review your debtor ledger and, for each overdue account, document the likelihood of full/partial/no recovery based on:

• Communications from the debtor
• Partial payments received
• Legal actions taken or considered
• The debtor’s financial situation (e.g., liquidation, administration)
• History of prior payments

HMRC is much more likely to allow a deduction where you’ve clearly documented your rationale.

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Case Study: Accelerate Corporation Ltd v HMRC [2025]

This recent First-tier Tribunal case serves as a textbook example of what can go wrong when provisions are not properly supported.

The Background

• Accelerate Corporation Ltd (AC) was a trading company.
• In its 2016 accounts, it made £300,000 in sales to a major client.
• The client did not pay, and AC’s director sought bad debt relief on the £300,000.
• The company claimed this amount as a deduction in the 2016 accounts (year to 30 September 2016), or alternatively in 2017.
• HMRC rejected the claim, arguing that no evidence supported the claim that the debt was bad or doubtful at that time.
• They instead allowed the claim only in the 18-month accounting period ending 31 March 2019—after the debtor company had ceased trading and been struck off.

What HMRC Found Problematic

1. No contemporaneous evidence that AC believed the debt was doubtful or bad in 2016 or 2017.

2. No formal debt collection action was taken (e.g., letters before action, solicitor engagement).

3. No write-off was recorded in the company’s accounts filed with HMRC.

4. The director told HMRC in 2022 that he still believed some of the debt might be recoverable.

5. AC hadn’t even included the sales in its accounts at the time—they operated “practically on a cash basis” (which is not permitted for companies).

The Tribunal ruled that:

“A taxpayer cannot arbitrarily choose the timing of their tax claim based on hindsight or convenience.”

Because the director could not demonstrate when he genuinely formed the belief the debt was bad, the court accepted HMRC’s timing—that the debt was bad only by 2019.

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Lessons from Accelerate Corporation Ltd

This case is not just about poor recordkeeping. It highlights several key lessons for any business handling bad debts:

1. Timing Is Everything

Tax relief on bad debts is only allowed in the accounting period where the debt became irrecoverable or doubtful—not before, not after.

You cannot retroactively assign the timing to maximise tax efficiency unless you have solid, dated evidence to back it up.

2. Document Your Judgement

If you believe a debt is bad or doubtful, write it down. Record the reasoning in a memo, board minutes, or ledger note. Include:

• Who made the assessment
• When it was made
• What evidence supported the view (emails, insolvency notices, etc.)

This becomes vital if HMRC asks questions later—or if you end up in a tribunal.

3. Accounts Must Reflect Reality

If you don’t record income properly (e.g., skipping sales invoices from your accounts), HMRC may not accept your provision. A company must use GAAP, not the cash basis, so all sales must be recorded—whether paid or not.

4. Partial Recovery Doesn’t Mean No Relief

If you think you might recover some but not all of a debt, you can make a partial impairment. Just show your workings and the basis of your estimate.

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What HMRC Wants to See

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What Happens If You Get It Wrong?

✅ If done correctly:

• You can deduct the amount from your profits—reducing your taxable income and possibly generating a tax refund (if carried back).

❌ If done incorrectly:

• HMRC can deny the deduction.
• If you’ve already claimed it in an earlier year, they may issue a discovery assessment and demand repayment with interest and penalties.
• Your accounts may also be considered non-compliant, increasing your audit risk.

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Practical Tip for Sole Traders and Partnerships

If you’re a non-incorporated business and using the cash basis for income tax, then bad debts are irrelevant—because you don’t count the income until it’s received.

❗ This can be a blessing if your customers are slow or unreliable payers.

However, the cash basis isn’t suitable for all businesses—especially if your turnover exceeds £150,000, or you have high capital expenditure.

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Final Thoughts – Bad Debts Aren’t Just a Financial Problem, They’re a Tax Issue Too

Handling bad and doubtful debts isn’t just a matter of prudent accounting—it’s a critical tax issue. Poor timing, lack of evidence, or confusion over the rules can cost businesses thousands in lost deductions or HMRC challenges.

At Merranti Accounting, we regularly help clients:

• Assess whether a debt qualifies for tax relief
• Document impairment decisions properly
• Ensure bad debt provisions are GAAP-compliant and HMRC-acceptable
• Plan the timing of tax relief strategically and legally

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Need Help with Bad Debt Relief?

If your business is facing slow payments or long-standing unpaid invoices, don’t leave tax relief on the table.

Contact Merranti Accounting today for a debt review and ensure your financial statements reflect the real position—while keeping HMRC on side.