Writing off bad debt: a decision you keep

Key takeaways

The bad debt write-off decision accepts that money owed will not be paid. A director or owner should approve every write-off, because it affects profit, tax and the customer relationship. An outsourced team can prepare the case: the chasing history, the amount, any VAT bad debt relief due and the recommended next step. Then it records the decision.

• A named director approves every write-off.
• Outsource the case file, records and VAT relief workings.
• VAT bad debt relief may apply after six months, under HMRC rules.
• Write-offs feed back into your credit policy.

Why must write-offs be approved internally?

Because a write-off gives up money, changes reported profit and can end a customer relationship. It is also an area where errors or fraud can hide: a fake write-off can disguise a diverted payment. An internal approver who sees each case keeps the process honest and learns which customers or terms cause losses.

• Which business processes should you never outsource?
• Financial controls that never leave the business

When should you write off a debt?

When collection has failed and the cost of further action outweighs the likely recovery: the customer has become insolvent, cannot be traced, or the amount is too small for legal action. Many firms review debts over 90 days each month and decide case by case.

• Customer insolvent or dissolved.
• Customer cannot be traced.
• Legal action would cost more than it recovers.
• A settlement for less has been agreed.

• Customer credit limits: outsource the checks, keep the call
• Outsourced invoicing and credit control in the UK

What can an outsourced team prepare?

A short case for each debt: the invoices, the chasing history, any promises made, the customer's status on Companies House, the cost of further action and the VAT position. After approval, it posts the write-off, claims any VAT relief through the return and updates the customer record.

• Keep the decision, outsource the admin around it
• VAT return preparation: outsource the routine, own the return

What about VAT bad debt relief?

If you accounted for VAT on a sale and were not paid, HMRC's bad debt relief may let you reclaim that VAT once the debt is over six months overdue and written off in your accounts, subject to conditions and time limits. Check the current HMRC guidance or ask your accountant before claiming.

• Tax returns: your accountant files, you are responsible

What does this look like in practice?

A pattern we see: old debts sit in the ledger for years because nobody decides. A quarterly review with prepared cases clears them, recovers VAT where it applies and shows which terms keep causing losses.

• See client work
• BPO Solutions for UK businesses

Bad debt write-off checklist

• Review debts over 90 days monthly.
• Prepare a short case for each write-off.
• A named director approves each one.
• Check VAT bad debt relief conditions.
• Feed lessons back into the credit policy.

• Customer credit limits: outsource the checks, keep the call
• Financial controls that never leave the business

Next step

Run an aged debt report and count invoices older than six months. Each one needs a decision: chase, settle or write off.