Do I pay tax on an invoice that was never paid?
The short answer
Yes, for a company. It counts a sale as income when it is earned3, and so does a sole trader on traditional accounting, so an unpaid invoice is taxed until it is written off. A sole trader on the cash basis, the default since 6 April 20241, owes no Income Tax on money not yet received1. If you're VAT-registered, VAT is due whether or not the customer has paid7, unless you use cash accounting.
England and Wales only. WolfX is software, not a law firm.
What you can add
A £4,800 invoice, still unpaid on 30 September 2026
Say you finished the work and invoiced another business £4,800 plus £960 VAT on 28 August 2026. On 30 September 2026 nothing has arrived. Treat the £4,800 as extra profit, with no costs set against it. The sum is for a limited company that is registered for VAT on standard accounting, with profits of £50,000 or less10 a year. Rates are the 2026 to 2027 ones: Corporation Tax for the year from 1 April 2026, Income Tax and Class 4 for the year from 6 April 2026.
A sole trader on the cash basis owes £0.00 Income Tax and Class 4 on it until the money arrives. On traditional accounting, with profits of £12,570 to £50,270, it adds 20% Income Tax11 and 6% Class 412: £4,800 × 26% = £1,248.00, not £912.00. The VAT is £960.00 on either basis, or £0.00 until paid on VAT cash accounting. The tax isn't a payment on the day you invoice: it goes into that year's bill. If the money doesn't come and you write the debt off, the £4,800.00 comes off the profit of the year you write it off, which usually takes back the £912.00. You can claim the VAT back8 once the debt has been unpaid for 6 months.
The road ahead
Five steps. All free.
Step 1: Find out how your books count a sale
Step 2: Work out the tax on the invoice
Put your invoice, before VAT, into the sum above. A company's profits follow its accounts under section 46 of the Corporation Tax Act 20092. On the cash basis it is £0.00 until the money arrives.
Rates depend on profit. For 2026 to 2027 a company pays 25% over £250,00010, with marginal relief above £50,000. A sole trader pays 40% Income Tax11 from £50,271 to £125,140 and 2% Class 412 over £50,270.
Step 3: Check the VAT on its own
If you're VAT-registered, you usually report the VAT on an invoice, and pay it, even if the customer hasn't paid7. The cash basis is an Income Tax rule: it doesn't change how you account for VAT6.
Under VAT cash accounting you pay the VAT when your customer pays you7. You can join if your VAT taxable turnover is £1.35 million or less7.
Step 4: If the debt turns bad, take the deduction
Under section 35 of the Income Tax (Trading and Other Income) Act 2005, a sole trader on traditional accounting deducts a debt that is bad, or estimated to be bad4, in the year it turns bad.
A company claims an impairment loss, which is the loss its accounts record on that debt. A general provision doesn't count5.
Note when and why you decided it was bad. Writing it off has its own page.
Step 5: Claim the VAT back after 6 months
If you paid HMRC the VAT, bad debt relief opens once the debt has been unpaid for 6 months8 after the later of the due date and the supply date, and you have written it off. The conditions, the box and the time limit are on their own page.
The letter
Nothing goes to your customer or to HMRC here: the page is about which rules your own books follow. The note for writing a debt off is on the write-off page.
When not to bother
When it isn't worth it
- You're a sole trader on the cash basis and not registered for VAT. Money you are owed but have not received doesn't count1, so an unpaid invoice adds no Income Tax. There is nothing to do until it lands.
- You pay Scottish Income Tax. The bands are different in Scotland11, so the 20% above may not be your rate. Your accountant can give you yours.
- You are thinking of switching basis for one invoice. Changing basis can mean adjustments1 to your books, and one invoice is rarely worth them. An accountant can say what the switch would do over the whole year.
- You only suspect a debt won't be paid. A deduction needs a debt that is bad or estimated to be bad, and a blanket percentage of your debtors doesn't count4. Keep chasing, and keep the dates.
- Your set-up is unusual. A partnership with a company as a partner, or a business that has claimed research and development allowance, can't use the cash basis1. An accountant can say which rule you are under.
The Wolf's note
Tax follows your books. If they count the invoice when you raise it, the tax comes with it, paid or not. If the money doesn't come, the way back is a deduction, so note the date you decided the debt was bad, and why.
Mr. Wolf · the AI inside WolfX
What comes next
Your next move
How do I write off an unpaid invoice in my accounts?
Only when you have decided it will not be paid and can show why.
6 min read · Letter included
Can I reclaim the VAT on an invoice that was never paid?
Yes. Six months after an invoice falls due, you can claim back the VAT you paid HMRC on it, in Box 4 of your VAT Return, once the debt is written off.
6 min read · Letter included
When it first goes quiet
How long can I chase an unpaid invoice before it's too late?
Six years to start a court claim for an unpaid invoice in England and Wales, usually from the due date.
6 min read · Letter included
Don't want to do this yourself?
The Wolf does every step for you. He works out the sums, writes the letters and keeps track of every date. Nothing goes without your yes.