What is a bad debt for tax purposes?
Answered 17 March 2026
What is a Bad Debt for Tax Purposes?
What the law says
For trading income purposes, the starting position is that no deduction is allowed for a debt owed to a trader. An exception applies only where:
- (a) the debt is bad;
- (b) the debt is estimated to be bad (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.
This is found in s.35 ITTOIA 2005 (and the equivalent s.55 CTA 2009 for corporation tax, though for CT purposes the rule applies only to non-money debts, as money debts fall within the loan relationship regime).
Where the debtor is bankrupt or insolvent, the whole of the debt is treated as estimated to be bad, except so far as any amount may reasonably be expected to be received.
A "statutory insolvency arrangement" means:
- A voluntary arrangement under the Insolvency Act 1986, Sch 4 or Sch 5 Bankruptcy (Scotland) Act 1985, or the Insolvency (Northern Ireland) Order 1989;
- A compromise or arrangement under Part 26 Companies Act 2006; or
- A corresponding arrangement under the law of a territory outside the UK.
HMRC guidance / practice
Definition: HMRC defines bad and doubtful debts as "debts proved or estimated to be wholly or partly irrecoverable and either written off by the lender (in the case of a debt which is wholly bad) or written down in the lender's books to their realisable value".
It is a question of fact whether a debt is bad. Where a company writes off a debt in its accounts rather than merely providing against it, this suggests it is in fact a bad (rather than merely doubtful) debt.
Timing: The deduction for a bad or doubtful debt is made in arriving at the profits of the year in which the debt becomes bad or doubtful. Importantly, hindsight is not permitted — the assessment must be made as at the last day of the basis period.
Quantification: A useful starting point for doubtful debts is the amount reserved in the taxpayer's books, provided this is based on a separate valuation of each debt.
What does NOT qualify:
- A general reserve (e.g. a flat percentage of total debts or total sales) calculated without regard to the circumstances of particular debtors is not an allowable deduction.
- A debt cannot be deducted merely because a debtor is a slow payer — there must be good reason for thinking the debt is likely to be bad.
- A debt cannot be deducted if it has been waived for reasons other than the debtor's ability to pay (e.g. waived simply because the debtor is a relative).
Recovery: If a debt previously deducted as bad or doubtful is later collected, it is treated as trading income in the period in which it is received.
Citation sources
Debts proved or estimated to be wholly or party irrecoverable and either written off by the lender (in the case of a debt which is wholly bad) or written down in the lender’s books to their realisable value. See also Impaired Debts.
It is a question of fact whether a debt is bad. Although in contrast to ICTA88/S74(1)(j), which deals with bad debt in the context of non-corporates carrying on a trade, there is no requirement that the bad debt must be proved to be bad, the scope of the two provisions will be the same. Where a company writes off a debt in its accounts rather than merely providing against it, this suggests that it is in fact a bad, rather than just a doubtful, debt.
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disallow entirely the claim for out-of-pocket expenses was entirely reasonable without any proof of what had been paid and for what. In consequence of these adjustments, the assessable profit of the partnership and the amount of those profits allocated to Mr and Mrs Boden in each of the years are as shown in the table at [104] above and the tax assessed on Mr and Mrs Boden for each of the years under consideration is as shown in the table at [105] above. Issue 5 -Whether bad debt relief is avail