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HMRC internal manual

Property Income Manual

HM Revenue & Customs
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Deductions: general rules: main types of expense: bad and doubtful debts

(2) Bad and doubtful debtsBring in as receipts rents etc that were earned in the year even if they were not paid until after the year ended (

PIM1101). A deduction is allowed in respect of:

  • a debt which is clearly irrecoverable
  • a doubtful debt to the extent it is estimated to be irrecoverable; the deduction is the full amount of the debt less any amount the taxpayer expects to recover(ICTA88/S74 (1) (j) or ITTOIA05/S272).

The taxpayer can only make a deduction where they have taken all reasonable steps to recover the debt.

The deduction is made in the year the debt becomes bad or doubtful. If the debt is later recovered the taxpayer should bring in the recovery as a receipt of their rental business in the year they get it. Similarly, if they have a doubtful debt which later looks as if it will be good, they should bring the debt back in as a receipt when prospects change.

A deduction cannot be claimed for a general bad debt reserve. For example, a taxpayer cannot deduct 5% of their debts just to be on the safe side. Deductions for bad or doubtful debts must be properly considered and the facts relating to each debtor taken into account. But if, exceptionally, the taxpayer has a large number of tenants and also records that show a stable past pattern, they may be able to calculate with sufficient accuracy the chance that a tenant already in arrears will never pay. A doubtful debt provision calculated on that basis may be deducted.

A bad or doubtful debt can’t be deducted merely because the tenant is always a slow payer. There has to be good reason for thinking the debt is likely to be bad.

A debt can’t be deducted if it has been waived for reasons other than ability to pay. For example, a debt can’t be deducted if it has been waived simply because the debtor is a relative.

A taxpayer may waive rent (payable in advance) before it is due to them because the tenant can’t afford to keep up the payments originally agreed in the lease. Provided the waiver is effective in revising the terms of the lease, the taxpayer will no longer be able to sue for the rent and, consequently, will no longer be taxable on it.

If the taxpayer does not agree to revise the terms of the lease but simply gives the tenant time to pay, they will still be taxable on the rent. But the bad debt rules outlined earlier may apply if there is genuine doubt about the tenant’s ability to pay in the end.