Q. In the wake of the pandemic I’ve been reviewing my books to get a more accurate view of unpaid sales invoices. There is a significant number of these from the end of 2021, as may be expected in the circumstances. Am I right in thinking I must wait six months before writing these off for tax purposes?
A: The six-month statutory time limit applies to VAT, rather than income tax. In theor there is no minimum time you need to wait before you can write off a debt for tax purposes. However, HMRC does require reasonable steps to have been taken to recover payment before you do so. It is not sufficient to make a provision for bad debts, as it is under accounting rules. In practice, you need to identify debts that are unlikely to be paid on a case-by-case basis.
For smaller debts, HMRC is likely to accept a couple of reminders to demonstrate that you have tried to recover what is owed to you. For larger debts it's more likely that more formal action would be needed to secure the deduction, e.g., appointing a debt collection service, or applying to a court to assist with recovery. There are no fixed rules, but HMRC is likely to accept a claim for bad debt relief if you have evidence that a debtor is in administration, or subject to insolvency proceedings. HMRC's guidance in their business income manual is a helpful reference.
