Can You Write Off Unpaid Invoices?

Providing goods and services as a freelancer or self-employed individual can be a precarious business since there’s no absolute guarantee that you’ll get paid. While the vast majority of transactions go smoothly, there are always some invoices that remain troublesome.

If there’s an outstanding payment which has been vigorously chased, there comes a point when you may need to accept it won’t ever be settled. This is likely to be particularly the case if the recipient has financial issues, such as a company that’s entered into liquidation or a person who’s been declared bankrupt.

But can you write off unpaid invoices? In short — yes you can. There’s nothing to prevent you from writing off any invoice as a bad debt. You should only ever exercise this option as a last resort, but if you have exhausted all your other options, sometimes it’s the only sensible decision.

A Doubtful Debt is Not a Bad Debt 

After a while, you may start to develop instincts that warn you when an invoice is never going to be paid. Nevertheless, it’s important to go through the correct process of chasing payment as financial difficulties may be short-lived.

Having doubts about whether an invoice will be paid is not the same as writing it off. When you write off an invoice, your business has to swallow the loss. Too many losses can seriously impact your cash-flow and may even jeopardize the future of your business. Therefore, you should always pursue every reasonable avenue to chase payment.

This may mean accepting a repayment plan or pursuing legal action if the recipient is still solvent. Only once you are certain that no further actions will produce payment should you consider writing off an unpaid invoice.

Do I Need to Report the Write-Off? 

When you make the decision to write off an invoice, it can have an effect on your accounting figures — but it won’t always be the case. While a written-off invoice will lead to a loss in practical terms, you might not have to report the bad debt to HMRC.

If you’re not a company that’s VAT-registered, it depends on the method you choose for your accounting. An accrual basis means that you count all invoices issued as income. If this is the method you use, then any invoices that are written off can be entered to offset any tax liability.

Some businesses use a cash basis, which is more common with freelancers and small businesses. Accounting on a cash basis only calculates tax on monies received. You won’t need to enter any bad debts in your HMRC submission because you won’t have recorded the income. This is a much simpler way of accounting and won’t be suitable for all types of business.

What About VAT-Registered Businesses? 

The process for VAT-registered businesses can be more complicated if you have already paid the VAT to HMRC. Some VAT-registered businesses opt to use the cash accounting basis, which means that they won’t need to make any adjustments as the VAT will not have been paid.

VAT-registered businesses that don’t operate on the cash accounting basis may end up paying VAT on invoices that they never receive payment for. This can leave you out of pocket, but there is a mechanism to reclaim VAT on bad debts.

The VAT on a bad debt can only be reclaimed if the VAT has already been paid to HMRC and the invoice has been formally written off in your accounts. You can’t pursue a claim for the repayment of VAT if the status of the invoice is still in question. The payment must have been due at least six months ago, but be no older than four years and six months.

We hope this information about unpaid invoices has been helpful for you and your business operations. It’s always important to do your research in order to understand fully what your options are and how you could potentially be penalized for unpaid invoices.

Staff Member


Suggested content


The Difference between an Invoice vs Receipt

by Staff Member May 06, 2021


How to Write an Invoice

by Staff Member May 06, 2021