Are unpaid invoices tax deductible? (2024)

Keeping your business finances in order and making sure all outstanding invoices are paid isn’t everyone’s favourite job, but it is essential.

As the end of another tax year looms, businesses will now be looking at their potential payable income tax for the year.

And as part of your end-of-year taxes, it’s important to be aware that you can write off any bad debts, to support a reduction in income tax.

This means you won’t be liable to pay/receive an inflated tax bill on the expected income fromunpaid invoices.

This is good news for small businesses as, of course, it’s never a great outcome for a business to receive a higher tax bill and in essence pay tax on money you never actually received.

However, remember writing off this bad debt means your overall income and bottom line is also negatively affected.

When is enough…enough?

There comes the point with overdue invoices when, unfortunately, you have to face facts. The money isn’t coming, and you need to write the invoice/debt off to ensure you don’t pay tax on monies you never received.

At Direct Route, we would always advise you to make sure you have exhausted all avenues to collect outstanding invoices. Professional debt collectors have notably high success rates and can advise on best practices, next steps, and ultimately the likelihood of success.

However, we also know that in some instances, overdue invoices simply can’t be collected; these are known asbad debtsand can be a serious financial problem for businesses.

We also understand that you really don’t want to pay tax on income you haven’t received, you’re already out of pocket, and you don’t want to be more.

Unpaid invoice tax write off

Bad debts from overdue invoices can be written off if they have previously been accounted for in your accounting processes and system, i.e., they are recorded when invoiced (also known as accrual basis).

However, if you report on when money is received i.e. a cash basis, income is not recorded or acknowledged until it is received hence there is nothing to `write off`.

To be classified as a bad debt and have the outstanding amount written out of your taxes, it must meet certain criteria. (These criteria and more information can also be found in theIncome Tax Assessment Act, sections 25-35.)

For example:

• The invoice must still be outstanding, and you must be able to show that you have followed robust processes and procedures to collect the debt.
• The debtor has passed, and there are no funds to settle the outstanding invoice.
• The debtor has gone away and can’t be traced.
• The debtor has gone bankrupt and has no financial means to pay.

And, there’s more…

Non-payment of invoice tax

As a business offering credit, it’s important to be aware that you can nullify bad debts if:

• You have included the income in your year-end accounts.

In addition, if you do write off bad debts in your account, you can claim aGoods and Service Tax refundon any taxes you have paid relating to this.

You must also be aware that if the bad debt is paid, at any point, you will need to include this income in the accounting year in which the debt was settled.

If there is any doubt surrounding the debt and payment, it cannot fall into the category of a bad debt, and it is often advisable to speak to an external accountant on the matter.

Accounting for bad debts

Bad debts must be recognised and accounted for within your accounts. They must be written off before the financial year end, and you must be in no doubt that the overdue invoice you are working with is indeed a bad debt.

To remove a bad debt from your accounts, the debt in question must be removed from your accounts receivable and placed on your profit and loss accounts.

Here, the unpaid invoice will be recorded as a bad debt and written off.

Late payment tax

It is always better to be paid than write off a debt.

Writing off overdue invoices, yes, means you are finally putting the matter to rest, but it also means your profit is negatively affected, and this is why it is essential that you try to collect on unpaid invoices at all costs.

This is where a professional, experienced, and trusted debt collection team can help.

Helping you to avoid writing off debts and keep your cash flow high, debt collectors help to avoid further accounting complications and reduce the stress associated with unpaid invoices.

Please contact me via LinkedIn or email dbarker@directroute.co.uk if you need any help collecting overdue invoices. Invoices of sub £3,000 are recovered at no cost to you, above £3,000 its just a minimal 2% commission.