Should you write off a bad debt or keep chasing it

It's one of the most frustrating dilemmas for any small business owner or freelancer: an invoice is long overdue, the client has gone quiet, and you're left wondering whether to keep pushing or simply give up. Chasing unpaid invoices costs time, energy, and sometimes even money. This article provides a practical framework for deciding when it's time to stop chasing and write off a bad debt, and explains exactly how the process works for your UK accounts and tax returns.

We'll cover the real cost of chasing, the steps to take before giving up, and how to correctly account for a write-off to ensure you can claim any available tax relief from HMRC. This is about making a sound business decision, not an emotional one, and protecting your cash flow and your sanity.

The Hidden Costs of Chasing an Overdue Invoice

When deciding whether to pursue a debt, it's easy to focus solely on the invoice value. But the true cost of chasing is far greater than the number on the page. To make an informed decision, you must consider all the resources you're expending.

Your Time Cost & The "Chasing Break-Even Point"

Your time is your most valuable asset. Every hour spent chasing a £150 invoice is an hour you can't spend on billable work, finding new clients, or developing your business.

To put this in perspective, calculate your "internal hourly rate." If you're a director paying yourself a £50,000 salary for a 40-hour week, your time is worth roughly £24 per hour. If you spend three hours emailing, calling, and stressing over that £150 invoice, you've already "spent" £72 of your own time trying to recover it. Suddenly, the net gain doesn't look so appealing.

A simple way to frame this is to calculate your Chasing Break-Even Point:

Invoice Value / Your Internal Hourly Rate = Maximum Hours to Spend Chasing

If your invoice is for £200 and your time is worth £40/hour, you should stop active chasing after five hours. Any more, and you're effectively losing money.

Opportunity Cost

This is the hidden killer of productivity. The time you spend chasing is time you are not spending on:

• Generating new business: Prospecting, networking, and marketing.
• Serving existing clients: Delivering high-quality work that leads to repeat business and referrals.
• Strategic planning: Working on your business, not just in it.
• Resting and recharging: Burnout is a real risk for small business owners, and chasing debts is a significant contributor to stress.

A single difficult client can consume the mental energy that could have been used to secure three new, better-paying ones.

Direct Financial Costs

While your initial chasing steps (emails, phone calls) might seem free, costs can escalate quickly if you decide to get serious:

• Letters Before Action: Sending recorded delivery letters adds a small but tangible cost.
• Debt Collection Agencies: Agencies typically charge a percentage of the recovered amount, often between 10% and 40%. On a small invoice, this can wipe out your profit.
• Legal Action: Using the Money Claim Online (MCOL) service has upfront court fees that depend on the value of the claim. If the debtor still doesn't pay after you win a judgment, you then have to pay more for enforcement action (e.g., bailiffs).

These costs are often not recoverable, especially if the debtor company has no assets.

A Framework for Deciding: Chase or Write Off?

There's no single magic number, but you can use a structured approach to make a logical, data-driven decision.

1. The Quantitative Assessment

First, do the maths. Use the break-even calculation to set a time budget for chasing the debt. This prevents you from falling into the "sunk cost fallacy" – the feeling that because you've already invested time, you must keep going.

Invoice Value	Your Internal Hourly Rate	Max Productive Chasing Hours	Action
£100	£25/hour	4 hours	After 4 hours, the cost of your time outweighs the debt. Automate or write off.
£500	£50/hour	10 hours	Dedicate a reasonable but capped amount of senior time.
£2,500	£75/hour	~33 hours	Worth significant effort, including considering legal routes.
£10,000+	£100/hour	~100 hours	A major debt. All options, including professional debt recovery, are on the table.

This table provides a starting point. Once you hit your maximum hours, your default action should be to stop manual chasing. At this point, you can either pass it to a low-cost automated system, or move to the write-off process.

2. The Qualitative Assessment

Next, look at the context. The numbers don't tell the whole story. Ask yourself these questions:

• Is the client still trading? A quick search on Companies House can tell you if a limited company is active, in liquidation, or dissolved. There is no point chasing a company that has been legally dissolved.
• Are they communicating? A client who is responding, even with excuses, is a better recovery prospect than one who has gone completely silent. Silence is a major red flag.
• Is there a genuine dispute? If the client is disputing the quality of your work, you have a different problem. You need to resolve the dispute before you can chase the debt. If you believe the dispute is baseless, you must be prepared to prove you delivered what was agreed.
• What is the client's payment history? Was this a one-off delay from a normally good client, or is this part of a pattern?
• Is the relationship valuable? Is this a large, long-term client where a single invoice issue is worth resolving gently? Or is it a small, one-off project where burning the bridge has no future consequence?

If the company is dissolved, the client has vanished, and the invoice is small, the decision is easy: write it off immediately. If it's a large invoice from an active company that is just being difficult, it's worth pursuing further.

The Steps to Take Before Writing Off a Debt

You should never write off a debt without first completing a robust, professional chasing process. This not only maximises your chance of getting paid but also provides the evidence you'll need for HMRC if you later claim tax relief.

1. Exhaust Your Standard Process: This should involve a series of automated or manual reminders. A typical escalation looks like this:

   • Polite reminder on the due date.
   • Firmer reminder 7 days later.
   • Phone call 14 days later.
   • Final reminder email 21 days later, stating that further action will be taken.

2. Add Statutory Interest and Compensation: For most UK business-to-business (B2B) transactions, you have a legal right to add interest and a fixed compensation sum to an overdue invoice under the Late Payment of Commercial Debts (Interest) Act 1998.

   • Interest: The statutory rate is 8% plus the Bank of England base rate. This is calculated daily.
   • Compensation: You can also add a one-off fixed sum.

Debt Value	Compensation You Can Add
Up to £999.99	£40
£1,000 to £9,999.99	£70
£10,000 or more	£100

Mentioning these statutory charges in your final reminder can often prompt a swift payment, as it shows you are serious and know your rights.

3. Send a "Letter Before Action" (LBA): This is the final formal step before starting legal proceedings. It's a formal letter that states the amount owed (including any statutory interest), summarises the case, and gives the debtor a final deadline to pay (usually 14 or 30 days) before you issue a court claim. An LBA demonstrates that you have acted reasonably, which is important if the case does go to court.

If the debtor still doesn't pay after an LBA, you have reached a critical decision point. You can either begin a legal claim via MCOL (weighing the costs and likelihood of success) or proceed to write off the debt.

How to Formally Write Off a Bad Debt in Your Accounts

"Writing off" a bad debt is an official accounting action. It means you accept the invoice will not be paid and you move the amount from an asset (Accounts Receivable) to an expense (Bad Debts).

This is crucial for two reasons:

1. It gives you an accurate picture of your business's financial health.
2. It is a necessary step to be able to claim tax relief.

While the exact steps vary by accounting software (Xero, QuickBooks, FreeAgent, Sage), the principle is the same. You typically need to:

1. Locate the original overdue invoice in your accounting system.
2. Create a Credit Note for the full outstanding amount of the invoice.
3. When creating the credit note, instead of allocating it to a normal revenue or sales account, you must allocate it to your "Bad Debts" expense account. Most software will have this as a default account in the Chart of Accounts. If not, you can create it.
4. Apply the credit note to the overdue invoice. This will mark the invoice as "paid" by the credit note, removing it from your list of outstanding debts and simultaneously recording the loss as an expense.

Crucially, keep all evidence. Store a record of all your chasing emails, call logs, the Letter Before Action, and any Companies House searches. You need a clear paper trail to justify to HMRC why you deemed the debt irrecoverable.

The UK Tax Treatment of Bad Debts

Correctly writing off a bad debt allows you to claim tax relief, softening the financial blow. There are two separate types of relief: one for Corporation Tax (or Income Tax for sole traders) and one for VAT.

Bad Debts and Corporation Tax

When you write off a specific trade debt, the loss is treated as an allowable business expense for Corporation Tax purposes.

• How it works: The amount of the written-off debt is included in your annual accounts as an expense (in the "Bad Debts" account). This reduces your total taxable profit for the year.
• Example: If your business has a taxable profit of £40,000 and you write off a £2,000 bad debt, your taxable profit becomes £38,000. At the current small profits rate of 19% Corporation Tax, this would save you £380 in tax (£2,000 x 19%).
• The Key Rule: HMRC requires that the debt be specific and written off in your accounts. You cannot claim tax relief for a general provision for doubtful debts (e.g., "I estimate 2% of my sales will go bad"). You must identify the specific invoice and have a reasonable basis for believing it will not be paid. Your chasing records provide this evidence.

For sole traders and partnerships, the principle is the same, but the bad debt expense reduces your profits for your Self-Assessment Income Tax return.

Bad Debts and VAT (Bad Debt Relief)

If you are VAT-registered and use standard (accrual) accounting, you have to pay the VAT to HMRC on every invoice you issue, whether you've been paid or not. If your client never pays, you are left out of pocket for the VAT.

Fortunately, you can reclaim this VAT from HMRC through "Bad Debt Relief," but there are strict conditions:

1. The debt must be at least 6 months old from the payment due date.
2. You must have already paid the VAT on the invoice to HMRC on a previous VAT return.
3. You must have formally written the debt off in your accounts (as described in the section above).
4. The value of the debt must not be more than the normal selling price of the goods or services.
5. The debt must not have been sold or passed to a factoring company.

Once all these conditions are met, you can claim the VAT back. You do this by adding the amount of the VAT from the bad debt to Box 4 of your next VAT return.

You must keep records to support your claim for four years, including a copy of the unpaid invoice and a separate Bad Debt Relief account that shows the amount, the date written off, and the VAT period in which you made the claim.

Frequently Asked Questions

What's the first thing I should do with an overdue invoice?

The first step should always be a friendly, polite reminder. Many late payments are due to simple oversight, not malicious intent. An automated email reminder sent on the due date is often all that's needed to resolve the issue without damaging the client relationship.

How much can I charge in late payment fees in the UK?

For business-to-business debts, under the Late Payment of Commercial Debts (Interest) Act 1998, you can charge statutory interest of 8% plus the Bank of England base rate. You can also add a one-off compensation payment of £40, £70, or £100 depending on the size of the debt.

Can I write off a debt and still try to collect it later?

Yes. Writing a debt off is an accounting and tax measure. It does not extinguish the debt in a legal sense. If a client who you had written off makes contact and wants to pay, you can accept the payment. You would then need to reverse the accounting entries, recording the income and repaying any VAT relief you claimed to HMRC.

When can I claim back VAT on a bad debt?

You can reclaim the VAT you paid to HMRC on an unpaid invoice once the payment is at least six months overdue and you have formally written the debt off in your day-to-day accounts. You make the claim on your next VAT return.

Is there a time limit for chasing a debt in the UK?

Yes. In England, Wales, and Northern Ireland, the Limitation Act 1980 sets a time limit of six years to start court action to recover an unpaid debt. This period generally starts from the date the payment was due or the last date the debtor acknowledged the debt in writing. In Scotland, the limit is typically five years.

What evidence do I need to write off a bad debt for tax purposes?

You need evidence to show HMRC that you took reasonable steps to recover the money and had a justifiable reason to believe it was irrecoverable. This should include copies of all reminder emails, logs of phone calls, any formal letters sent (like a Letter Before Action), and records showing the client's company may have ceased trading (e.g., a screenshot from Companies House).

Reduce the Risk of Bad Debts with Automated Chasing

The time, stress, and financial loss associated with chasing invoices and writing off bad debts can be a major drain on a small business. The most effective strategy is to prevent invoices from becoming seriously overdue in the first place through a consistent and professional credit control process. Manually managing this is time-consuming and prone to human error.

This is where automation can transform your accounts receivable. InvoiceReminder connects directly to your accounting software (including Xero, QuickBooks, Sage, and FreeAgent) to automate the entire invoice chasing process. You can set up your own schedule of reminders, from gentle nudges to firm final notices, which are then sent automatically without you needing to lift a finger. This ensures every invoice is chased consistently and professionally, significantly reducing the chance of a debt escalating to the point of a write-off. For UK businesses, freelancers, and their accountants, it can remove one of the most tedious parts of running a business. The Free plan currently includes unlimited email reminders at no cost.