What happens to my tax if a customer does not pay me?

On the cash basis, the default for sole traders since 2024-25, a customer who never pays you costs you no tax: unpaid invoices are never counted as income. Traditional accounting and VAT have their own rules.

The rules below follow GOV.UK's guides, the bad debts law and HMRC's VAT notices, as checked on 17 October 2026.

How an unpaid invoice is treated

On the cash basis

GOV.UK's rule is simple: record only income you actually receive, and do not count money you are owed but have not been paid. An invoice that is never paid is never income, so it never adds to your profit or your tax bill. That is also why GOV.UK says bad debts cannot be claimed on the cash basis: there is nothing to take back out.

With traditional accounting

Your turnover includes everything you have invoiced, paid or not. GOV.UK says you can claim an unpaid amount as a bad debt only once you are sure it will not be recovered. The law (section 35 of the Income Tax (Trading and Other Income) Act 2005) allows a deduction only for a debt that is bad, or estimated to be bad, and treats the whole debt as bad if the customer is bankrupt or insolvent, except for anything you can reasonably expect to get back.

The rules that catch people out

• No blanket write-offs. Each debt is looked at on its own. GOV.UK says you cannot just estimate that your bad debts equal 5% of your turnover.
• Slow is not bad. HMRC's manual says a customer who always pays late, and whose finances have not changed, is not a doubtful debt just because the invoice is old.
• Only debts in your turnover. You cannot claim a debt you never counted as income, or one from selling your van, machinery or other fixed assets.
• Letting a relative off. Waiving a family member's debt for reasons other than their finances may not count.
• Keep the evidence. HMRC can ask how and when you decided a debt was bad.

VAT bad debt relief

If you are VAT registered, you may have paid VAT to HMRC on an invoice the customer never settled. VAT Notice 700/18 lets you claim it back if, among other conditions:

1. you have already accounted for the VAT and paid it to HMRC;
2. you have written off the debt in your VAT records and moved it to a separate bad debt account;
3. the debt has stayed unpaid for 6 months after the later of the date payment was due and the date of the supply; and
4. you have not sold or factored the debt.

You put the VAT you are reclaiming in box 4 of the VAT Return for the period in which you first meet the conditions, and you must claim within 4 years and 6 months of the later of those two dates. If the customer paid part of the bill, only the VAT on the unpaid part comes back. On the Flat Rate Scheme you can still claim. With the basic turnover method, VAT Notice 733 works it out at the standard VAT rate, not your flat rate; the cash turnover method has its own rule.

Do not send a credit note just because the customer has not paid. HMRC says credit notes are only for a genuine mistake, an overcharge or an agreed reduction in price.

Two cases where it does not arise. Under the VAT Cash Accounting Scheme you only pay VAT on money you have received, so relief is unnecessary. And on work under the construction reverse charge you do not charge VAT to the contractor, because the contractor accounts for it, so HMRC says bad debt relief does not apply.

Worked example

A self-employed electrician rewires a house for £3,000 in July 2026. The customer pays nothing and, by the end of the tax year, has ignored every call, reminder and letter.

• On the cash basis: the £3,000 was never received, so it is not in the electrician's 2026-27 income. There is nothing to claim and no tax to pay on it.
• With traditional accounting: the £3,000 is in 2026-27 turnover. The bad debt deduction goes in the tax year the debt becomes bad. If that is 2026-27, it comes back out of that year's profit; if it only becomes bad later, it is taxed in 2026-27 and comes off the later year's profit.

This is an example only, with no VAT.

What this means for you

For most sole-trader trades on the cash basis, an unpaid invoice has no tax effect: you do not record it until the money arrives, if it ever does.

With traditional accounting or VAT, a bad debt needs a dated record of when and why you decided it would not be paid.

Steps when a customer will not pay

1. Check which basis you use. On the cash basis, record nothing until you are paid.
2. Keep chasing in writing and keep copies.
3. If you use traditional accounting and are sure you will not be paid, write off that invoice as a bad debt in the figures for the tax year in which it became bad, with a note of when and why you decided.
4. If you are VAT registered, diary the date 6 months after the later of the payment due date and the date you did the work, then check the bad debt relief conditions before claiming on your VAT Return.
5. If the customer pays later: on the cash basis, record it as income on the day it arrives. With traditional accounting, money back on a debt you claimed as bad counts as income in the year you receive it; a debt you never wrote off is already in your turnover, so do not count it again. If you claimed VAT bad debt relief, pay back the VAT part of the payment in box 1 of the VAT Return for the period you are paid.

If you are in Making Tax Digital (MTD), these rules do not change. The free MTD check shows when MTD starts for you, and the trades section has more guides on running a trade.