Do you get relief for unpaid loans? Bad Debts

Lending directly to businesses or via Peer to Peer platforms is becoming very popular, but what happens if the borrower goes bust and can’t repay you?

HS296 Debts and Capital Gains Tax (2019)

Losses on loans to traders

If you make a loan to a trader you may be able to claim an allowable loss if the loan cannot be repaid. The loan must have been used wholly for trade purposes and have become irrecoverable. You cannot claim if the borrower was your spouse or civil partner, either when the loan was made or subsequently.

Example 1
You lend £30,000 to your brother to start a bicycle shop. After trading successfully for a number of years, the business fails. £5,000 of the loan is repaid to you but £25,000 is irrecoverable. You can claim an allowable loss of £25,000. If you claim the relief you’ll be taxable on any amounts of the loan subsequently repaid.

Example 2
Two years after you make the claim your brother is able to repay £10,000. You’re treated as having made a capital gain of £10,000 in the tax year in which the £10,000 is repaid.

Loans that qualify

To qualify for relief the loan must be to a borrower who:

is resident in the UK

uses the money wholly for the purposes of a trade

uses the money to set up a trade, as long as they start trading

A trade includes a profession or vocation, but does not include money lending. If the loan is made to a company, that company can pass the money to another company in the same group to be used in that other company’s trade.

Loans may include credit balances on a director’s loan account but not ordinary trade debts. Exceptionally, trade debts may qualify for relief if there’s a specific agreement to extend the period of credit beyond what’s customary for the trade concerned. But you cannot claim an allowable loss if you’ve claimed the bad debt as a trading expense.

Peer to peer lending

How peer to peer lending works

Lenders place their money with a peer to peer platform which is then lent to lots of different borrowers as many small loans. Each borrower borrows small amounts from many different lenders to make up the full loan they need. The platform will collect the repayments of interest and capital from each borrower and pass them to the lenders.

Claiming tax relief on unpaid loans

If a peer to peer loan isn’t repaid the lender can set the loss they suffer on the loan against the interest they receive on other peer to peer loans before the income is taxed.

Tax relief is available to peer to peer lenders who:

are liable to UK Income Tax on their peer to peer income

make loans through peer to peer lending platforms that are authorised by the FCA

are the legal lender at the time when its agreed that the loan has gone bad

When relief can be obtained

Tax relief applies when there is no reasonable prospect of the peer to peer loan being repaid, it doesn’t apply to late payment.
The amount of relief available is the peer to peer loan still outstanding from the borrower, less repayments already received.

Relief for bad debts on peer to peer loans can only be set against interest that the lender receives on other peer to peer loans, it cannot be used against any other form of income.


How do you claim VAT Bad Debt Relief?

Debt Envelope Scattered Stack

VAT Notice 700/18 sets out the basic rules

Conditions for claiming bad debt relief

Number Condition(s)
1. You must already have accounted for the VAT on the supplies and paid it to HM Revenue and Customs.
2. You must have written off the debt in your day to day VAT accounts and transferred it to a separate bad debt account.
3. The value of the supply must not be more than the customary selling price.
4. The debt must not have been paid, sold or factored under a valid legal assignment. (See paragraph 3.12).
5. The debt must have remained unpaid for a period of six months after the later of the time payment was due and payable and the date of the supply (one year after the date of supply for supplies made from 1 April 1989 to 31 March 1992), and
6. If the goods were supplied before 19 March 1997, ownership must have passed to your customer, or through the customer to a third party.
7. For supplies made to a VAT registered customer between 26 November 1996 and 30 April 1997, you must send a notice to them. A copy of the notice must also be retained. (See paragraph 2.7 for an example).


You must wait at least six months from the later of when payment was due and payable or the date of supply. The due date for payment may be determined by your normal credit terms, or by any longer period for payment which you agree with your customers. You cannot claim on a return for an accounting period earlier than the one in which you become entitled to the relief.

For supplies made after 30 April 1997, you must claim within four years and six months of the later of, when payment is due and payable or the date of supply.

Do I have to keep any records?

Yes, when you can claim a refund you must keep:

  • a copy of the VAT invoices for the supplies on which you are claiming a refund. (If you did not issue a VAT invoice you must have a document showing the equivalent information), and
  • a separate bad debt account showing the:
    (a) amount you have written off as a bad debt
    (b) amount of VAT you wish to claim as bad debt relief
    (c) VAT period in which you have claimed a refund
    (d) total amount of VAT charged on each supply
    (e) VAT period in which you originally accounted for VAT on the supply
    (f) payment received for each supply
    (g) name of your customer, and
    (h) date and number of the invoice to which the bad debt relates. (If you did not issue an invoice you must include sufficient information to allow the time and type of the supply to be readily identified)
    (i) a copy of any notice issued

Important things to note

  1. For Sales after 1st January 2003 it is not necessary to inform the customer that you are claiming bad debt relief
  2. The Bad Debt Relief Account is not part of the statutory accounts and does not mean the bad debt has been written off
  3. The Bad Debt Relief Account is often kept as a separate manual record supplementary to the main VAT records
  4. The VAT Bad Debt Reclaim is entered as Input Tax in period in which it is claimed
  5. Any money which comes in subsequently is considered to include VAT

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