Can you write off unpaid invoices

Can you write off unpaid invoices?

Small businesses frequently deal with unpaid invoices. In fact, research suggests that unpaid invoices currently stand at 41% in the UK, with a staggering 52% of invoices issued by small businesses paid late.

Unpaid invoices and overdue invoices are the bane of any small business. Affects your day-to-day cash flow, with the long-term effect of preventing business growth.

In addition, if you have numerous outstanding invoices, it can also mean that you’re paying tax on income you haven’t even received – taking revenue away from other areas of the business to support this.

Taking up a large proportion of time and resources, business owners will often look to write off debt rather than continue to chase it.

However, writing off unpaid invoices isn’t always straightforward or is indeed the easiest and best option.

Having stringent credit control processes in place and working with a professional commercial collection agency like Direct Route is your best chance to minimise late payment risk and ensure you’re paid on time, every time.

Of course, we understand that sometimes you may be in a position where a specific debt is no longer of value, and therefore you can and should write this debt off altogether.

How to write off a debt

Writing off debt in the UK is not as straightforward as it may seem. Firstly, you must ensure that the client does actually have a legal obligation to pay you, i.e., you have a contract in place, and they have now broken the terms of this contract.

In addition, a lot of what you can and can’t do in terms of writing off invoices and debt will come down to your accounting processes.

For example, as part of your accounting process, if you only count revenue when you receive it, then technically, if you receive nothing, you have nothing to write off.

However, if you had included your income in your accounting when you earned it, i.e., this is recorded in your digital accounting software, and you’re now aware that you won’t be getting paid, you can write off the debt as a bad debt expense, as you would have already paid tax on the amount of the invoice, so you can deduct the amount of the invoice as a bad debt and write it off.

However, there are still criteria surrounding overdue invoices to determine if the debt does, in fact, qualify as a bad business debt. Therefore, just because an invoice is overdue does not mean that you can automatically claim it as a bad debt expense.

This, instead, must be proven by:

  • The unpaid invoice must be worthless – i.e., the customer has gone bankrupt, died, or has stated that they won’t pay.
  • The debt is related to your business – you must track all of your efforts to collect the debt and include the invoice number, due date, and how long the invoice has now been overdue.
  • You have suffered a financial business loss as a result of the invoice remaining unpaid.
  • You must consider if the invoice will be paid in the future and what the likelihood of this is.

As previously mentioned, it is necessary that you keep all evidence, information, and proof to support your unpaid invoice so that it can be written off accurately.

Hiring a debt collection agency

You must show and have evidence that you have taken all reasonable steps to attempt to collect overdue invoices before you write off the debt.

These steps should include sending letters or emails, making phone calls, working with a professional collection agency, and more.

Hiring a professional collection agency can be the most effective and efficient way to manage late payment of invoices.

Success rates vary from collection agency to collection agency. However, when businesses and individuals receive formal communication from a professional commercial collection agency, the chance of payment being received increases to over 85% (on average).

This small step in outsourcing your late payments can go a long way to helping you get your finances and cash flow back on track and resolve any accounting issues or the need to write off the debt.

With late payments and invoices overdue affecting your bookkeeping and taxable income, make now the time to take action.

At Direct Route, we can work as an extension of your credit control team or your complete credit control team – flexible and versatile to meet your requirements.

Our experienced team is on hand and ready to support your credit control processes and provide further information to identify if your unpaid invoices meet the set criteria for writing off debts.

Keep your business on track with Direct Route.

Call a member of our professional team today on 0330 229 1991 or email your requirements to memberbenefits@directroute.co.uk.