Most subcontractors know unpaid invoices are painful. Very few know that without the correct paperwork, an unpaid invoice becomes two financial hits: the money you never received, and the tax you pay on it anyway. The bad news: this happens to thousands of tradespeople every year. The good news: it is entirely fixable — with the right documentation and a single entry in your accounts.

The Double Loss Most Subcontractors Don't See Coming

Here is the scenario that plays out constantly across the construction industry. You complete a job. You raise an invoice for £5,000 plus VAT. The contractor delays payment, then stalls, then goes into administration. The money is gone.

What most subcontractors do not realise is that if they account on the accruals basis — which applies to most businesses, and all those with turnover above £150,000 — HMRC recorded that invoice as income the moment it was raised. Not when it was paid. Not when you received the money. The moment you invoiced.

Without formal action, you owe Income Tax on £5,000 of profit you never made, and VAT on £1,000 you handed to HMRC on a transaction that never completed. The contractor's insolvency is your problem. That is the double loss.

Cash Basis vs Accruals: Which Rules Apply to You?

Before you can claim bad debt relief, you need to understand which accounting method you are using — because the risk is different for each.

The Real Numbers: One Unpaid Invoice, Two Outcomes

You invoiced £5,000 + £1,000 VAT. The contractor went into administration. The debt is unrecoverable.

How Bad Debt Relief Works: The Two Routes

Route 1 — Income Tax Relief (Accruals Basis)

To remove the unpaid invoice from your taxable profit, you must write off the specific debt in your accounts — not add it to a general "provision for doubtful debts." HMRC does not accept general provisions. You must identify the exact invoice, prove the work was done and the debt is unrecoverable, and record the write-off as a specific bad debt expense.

Your accountant then reduces your taxable profit by that amount when preparing your Self Assessment. The result: no Income Tax on income you never received.

Route 2 — VAT Bad Debt Relief

If you are VAT-registered and have already paid the VAT on the invoice to HMRC, you can claim it back — but only once four strict conditions are met:

Once all four conditions are met, add the VAT reclaim to Box 4 of your next VAT return. Keep a copy of the original invoice, proof of the debt, and your Bad Debt Refund Account entry — HMRC may ask to see these if they review your return.

Step-by-Step: Writing Off a Bad Debt Correctly

Work through these steps in order. Skipping any one of them risks HMRC rejecting the claim — or worse, flagging the write-off as an error that triggers a wider review.

• 01
  Gather Your Evidence Before You Write Anything Off HMRC requires proof that the work was completed and the money was genuinely owed. Collect the original invoice, the signed contract or written agreement, timesheets, delivery notes, or any other documentation that shows the job was done. Without this, the claim has no foundation — and if HMRC challenges it, you have nothing to show them.
• 02
  Document Your Recovery Attempts A debt must be demonstrably unrecoverable — not just late. Save every email chasing payment, every letter, every text message, every phone log. If the contractor has entered administration, keep a copy of any insolvency notice. The more evidence you have that you tried and failed to recover the debt, the stronger your write-off position.
• 03
  Make a Specific Write-Off in Your Accounts In your accounting software, create a specific bad debt entry against that individual invoice — not a general provision. The entry must reference the exact invoice number, date, client, and amount. A general "bad debt reserve" does not satisfy HMRC's requirements and will be disallowed. Your accountant can confirm the correct journal entry if you are unsure.
• 04
  Set Up a VAT Bad Debt Refund Account If you are VAT-registered, create a dedicated Bad Debt Refund Account in your records and transfer the relevant VAT amount to it. This is a specific HMRC requirement — without it, your VAT reclaim is technically invalid. Once the account is set up and the four conditions are met, claim the VAT in Box 4 of your next return.
• 05
  Tell Your Accountant Before They File Your Return The write-off must be reflected in your Self Assessment for the relevant tax year — it is not automatic. Flag every bad debt to your accountant when they are preparing your return. If you only mention it after filing, an amendment is possible but creates additional work and potential HMRC scrutiny. Get it right first time.
• 06
  Adjust Immediately If You Receive Partial Payment Later If you write off a debt and the administrator later distributes a partial dividend to creditors, you must reverse part of the write-off. Failing to do this — claiming relief on the full amount when you ultimately received something — is an HMRC compliance risk. Keep monitoring insolvent clients in the months after the write-off.

What Goes Wrong — And Why