Can I claim a deduction for bad debts as a sole trader?
Answered 17 March 2026
Yes, as a sole trader you can claim a deduction for bad debts. Here is a full breakdown:
What the law says
The governing provision for sole traders is ITTOIA 2005, s. 35. It provides that in calculating the profits of a trade, no deduction is allowed for a debt owed to the trader except so far as:
- (a) the debt is bad;
- (b) the debt is estimated to be bad (i.e. a doubtful debt); or
- (c) the debt is released wholly and exclusively for the purposes of the trade as part of a statutory insolvency arrangement.
Where the debtor is bankrupt or insolvent, the whole debt is treated as estimated to be bad, except to the extent any amount may reasonably be expected to be received.
Important caveat — cash basis: If you calculate your profits on the cash basis, s. 35 does not apply at all. Under the cash basis, you only bring in receipts actually received, so bad debt relief is not needed (and not available) as a separate deduction.
If a debt is later recovered after you cease trading, the amount recovered is treated as a post-cessation receipt to the extent of the deduction previously allowed (ITTOIA 2005, s. 192 / CTA 2009, s. 192).
HMRC guidance / practice
HMRC's guidance (BIM42700 onwards) confirms and elaborates on the statutory rules:
-
Timing: The deduction is made in the year the debt becomes bad or doubtful — hindsight cannot be used to claim relief in an earlier period.
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Doubtful debts: A useful starting point for quantifying a doubtful debt deduction is the amount reserved in the taxpayer's books, provided it is based on a separate valuation of each debt.
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No general reserves: A general reserve (e.g. a flat percentage of total debts or total sales) calculated without regard to the circumstances of individual debtors will not be admitted as a deduction.
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Recovery: If a debt previously written off is later collected, the amount recovered must be brought back into trading income in the year of recovery.
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Accruals basis: Under GAAP/accruals accounting, a trade debt is first included as a receipt (income) when earned. The bad debt deduction is then a separate expense to remove the irrecoverable element.
Summary
| Condition | Deductible? |
|---|---|
| Debt confirmed as bad | ✅ Yes |
| Debt estimated to be bad (doubtful), assessed debtor-by-debtor | ✅ Yes |
| Debt released as part of a statutory insolvency arrangement | ✅ Yes |
| General percentage reserve (no individual assessment) | ❌ No |
| Profits calculated on the cash basis | ❌ s.35 does not apply |
Citation sources
Part 3 Trading income Chapter 15 Post-cessation receipts Sums treated as post-cessation receipts Debts paid after cessation 192 1 This section applies if, in calculating the profits of a trade for corporation or income tax purposes, a deduction is made in respect of a debt under— a section 55 (bad debts), or b section 35 of ITTOIA 2005 (bad and doubtful debts), and a person permanently ceases to carry on the trade. 2 A sum received after the cessation is treated as a post-cessation receipt so fa
It follows that receipts may need to be brought in before they have been received in cash. Don't exclude receipts merely because they have not actually been paid by the year end or because the debt may be bad. But you can, as a separate matter, deduct as an expense the amount of any receipt which has been included in the profit or loss computation and which is genuinely bad or doubtful. There is more about bad and doubtful debts at BIM42700 onwards.
A deduction is not allowed for a debt owed to a trader except: a bad debt; a doubtful debt to the extent estimated to be bad. In the case of the bankruptcy or insolvency of the debtor, this means the debt except to the extent that any amount may reasonably be expected to be received on the debt; a debt or part of a debt released by the creditor wholly and exclusively for the purposes of the trade as part of a statutory insolvency arrangement. ‘Statutory insolvency arrangement’ means: (a) a volun
Part 2 Trading income Chapter 4 Trade profits: rules restricting deductions Cash basis accounting Application of Chapter to the cash basis 32A 1 The following sections do not apply in calculating the profits of a trade on the cash basis— section 33 (capital expenditure), section 35 (bad and doubtful debts), sections 36 and 37 (unpaid remuneration), section 43 (employee benefit contributions: profits calculated before end of 9 month period), sections 48 to 50B (car hire). 2 For rules restricting
The following guidance does not apply to bad money debts of companies which are dealt with under the loan relationship rules. See BIM42701. Where a deduction for a bad or doubtful debt has been made and the taxpayer subsequently recovers the debt or an amount in excess of its written-down value, the amount recovered or the excess should be brought into credit in the year of recovery (see Bristow v William Dickinson & Co Ltd (1946) 27 TC 157). As regards the treatment of debts recovered after the