How to write off a sales invoice to bad debt

There may be times when you need to write off a customer invoice because they haven’t paid it. This could be because the customer’s company has gone into liquidation or due to a dispute. You can write off your customer’s invoice by posting a credit note to your Bad Debts nominal ledger account. This offsets the bad debt against your profit for the current financial year.

If you use the Standard VAT Scheme, you may also qualify for bad debt relief which means you can reclaim the VAT you’ve already paid to HMRC. If you use the VAT Cash Accounting Scheme, VAT calculates based on the payments you receive or make. As the customer hasn’t paid you, there’s no VAT to reclaim.

Bad debt relief conditions

If you use the Standard VAT Scheme, there are certain conditions you must meet before you can reclaim the VAT, for example:

  • You’ve already accounted for the VAT on the supplies and paid it to HMRC.
  • You’ve written off the debt in your day-to-day accounts and transferred it to a separate bad debt account. You do this when you create the credit note.
  • The debt is more than six months old but less than four years and six months old.

There are additional conditions you must satisfy. For more information about these conditions and whether you can reclaim bad debt, please contact HMRC or see the ‘Bad debts’ section on the VAT Returns page on GOV.UK

To check your bad debt nominal ledger account

Before you can create a credit note using the Bad Debts nominal ledger account, you must check it’s visible for sales.

  1. Go to Settings, then click Chart of Accounts.
  2. In the Search for a code or name box, enter 8100.
  3. Click the Bad Debts nominal ledger account.
  4. In the Visibility section, select the Sales – Invoice / Credit, Product / Services / Customer defaults check box.
  5. Click Save.

To write off a sales invoice – Standard VAT

  1. Go to Sales, then click Quick Entries.
  2. Click New Quick Entry, then enter the following information:
Type * Click Cr Note.
Date * Enter the date you want to use for the write off.
Customer * Click the relevant customer.
Reference * Enter a reference of your choice, for example, Bad debt.
Ledger Account* Click Bad Debts (8100).
Details If required, enter any additional details.
Net Enter the gross value of the invoice you want to write off. As there is no VAT on the credit note, this ensures that the whole value is written off.
VAT Rate Click No VAT.

Note: The credit note for bad debt write off doesn’t appear on the VAT Return. If you qualify for bad debt relief, you need to follow the steps in the To reclaim VAT – Standard VAT section.
VAT 0.00

*These details are compulsory.

  1. Click Save.

You’ve successfully recorded a credit against the Bad Debts nominal ledger account. To clear the outstanding debt, you must allocate it to the invoice.

To write off a sales invoice – VAT Cash Accounting

  1. Go to Sales, then click Quick Entries.
  2. Click New Quick Entry, then enter the following information:
Type * Click Cr Note.
Date * Enter the date you want to use for the write off.
Customer * Click the relevant customer.
Reference * Enter a reference of your choice, for example, Bad debt.
Ledger Account* Click Bad Debts (8100).
Details If required, enter any additional details.
Net Enter the net amount of the invoice you want to write off.
VAT Rate Choose the relevant VAT rate.

Note: This must be the same VAT rate as the original invoice. If it’s not, you can’t allocate the credit note to the invoice.
VAT Enter the VAT amount.

*These details are compulsory.

  1. Click Save.

You’ve successfully recorded the credit note against the Bad Debts nominal ledger account. To clear the outstanding debt, you must allocate it to the invoice.

To reclaim VAT – Standard VAT

To reclaim VAT, you need to post a journal to move the VAT value from the Bad Debts nominal ledger account to the VAT on Purchases nominal ledger account. The VAT then appears on your VAT Return, which reduces your liability to HMRC. This is in line with HMRC guidelines.

You must ensure you meet the necessary conditions before you can reclaim the VAT. If you’re not sure whether you meet the conditions, or how much you can reclaim, please contact HMRC.

You can find further information on the conditions from VAT Notice 700/18: relief from VAT on bad debts.
  1. Go to Journals, then click New Journal.
  2. Enter the Reference and Date.
  3. If required, add any additional details to the Description field.
  4. Enter the relevant information to reclaim the VAT, for example:
Ledger Account* Details Debit Credit Include on VAT Return?
Bad Debts (8100) VAT reclaim 0.00 Reclaim value Leave clear
VAT on Purchases (2201) VAT reclaim Reclaim value 0.00 Select the check box
  1. Click Save.