Skip to main content What is a bad debt?
A bad debt is the name given to an invoice you’ve issued to a customer that will never be paid.
This might be because your customer can’t pay - perhaps because their business has closed or gone into liquidation - or because they are refusing to pay.
In either case, you would usually ‘write off’ the bad debt. This means you would remove it from your books by reducing the amount of money you’re expecting to receive from your customers (that is, your trade debtors), and showing the value of the debt excluding VAT as a cost to your business. This is because when the invoice was issued, its value would have been shown as income, increasing your business’s profit. Including the value as a cost when the debt is written off creates a corresponding reduction in your profit.
You may also be entitled to claim bad debt relief on any VAT from the invoice, but you can’t claim this until six months have passed from the invoice due date, even if you know before then that you will never be paid.
Keeping track of invoices
FreeAgent’s accounting software features an Invoice Timeline, so you can see at a glance which invoices have been paid and who you need to chase up.
Disclaimer: The content included in this glossary is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this glossary. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.