Bad Paying Customers

I have a particular customer who has a history of bad payments with me. I am considering taking legal action against this customer to try and recover this debt. Can my solicitor’s fees and other legal costs be regarded as a legitimate business expenses for tax purposes and are there different procedures depending on the size of the debt?

1st May 2010

Legal and professional costs that a business incurs are allowable when they are incurred wholly and exclusively for the purposes of the trade.

Legal fees incurred in attempting to recover bad debts are deemed to be incurred for the purpose of the trade and are therefore considered to be allowable expenditure in establishing your business profit for the year.

In addition to being an allowable deduction in the accounts, as the debt relates to a specific customer, the legal fees incurred in respect of that debt recovery will be also be allowable as a deduction for tax purposes.

It should also be noted that where a bad debt relating to ordinary trade transactions with a specific customer is written off, that amount is also an allowable deduction.  This contrasts with the rules for a general bad debt provision, which is not an allowable deduction for tax purposes.

By Jo Nockels

Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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