How to write off a bad debt in Xero, and the GST or VAT you can get back

Short answer: when an invoice will never be paid, write it off so Xero stops counting it as money owed to you. The usual way is to open the invoice, add a credit note against it, change the account on each line to a Bad Debts expense account and approve it (do not email it to the customer). The invoice leaves Awaiting Payment and the Aged Receivables report, and the amount before GST or VAT becomes an expense on your Profit and Loss. If you pay GST or VAT on the accruals basis you already paid tax on that invoice, and you can usually get it back: in Australia once the debt is written off or 12 months overdue, in New Zealand once it is written off, and in the UK through VAT bad debt relief six months after the due date. Agree the tax treatment with your accountant or BAS agent first.

When a debt counts as bad

Writing off is a decision, not something that happens when an invoice gets old. A debt is usually bad when you have genuinely tried to collect it and it is not coming: the customer has gone into liquidation or bankruptcy, has disappeared, disputes it and you have agreed to drop it, or chasing it would cost more than it is worth. Keep a note of what you did to collect (reminders, calls, letters), because both the tax office and your accountant will want it.

Before writing off, check that it is not a Xero problem rather than a customer problem. A payment that arrived but was never matched, or a credit note that was never allocated, makes a customer look as though they owe money they have paid. The who owes me money guide covers those checks.

How to write off a bad debt in Xero

1. Make sure you have a bad debts account. Look in Accounting › Chart of accounts for one called Bad Debts (or Bad and Doubtful Debts). If there is none, add one with the type Expense.
2. Open the invoice from the invoices list (it will be under Awaiting Payment).
3. Add a credit note against it from the invoice’s options menu. Xero copies the invoice lines into the credit note.
4. Change the account on every line to Bad Debts. Leave the amounts as they are for a full write-off, or reduce them for a part write-off.
5. Check the tax rate (see the next section: it decides whether the GST or VAT reverses).
6. Approve it, and do not send it. Xero allocates the credit to the invoice, which drops out of Awaiting Payment and the Aged Receivables report. The customer still legally owes you the money, and an emailed credit note tells them otherwise.

Menu names move between Xero releases and regions, so search Xero Central for “credit note” if your screen differs. Some bookkeepers use a different method, such as recording a payment from the bad debts account; any method that ends with the invoice cleared and the cost in the bad debts account gives the same Profit and Loss.

Getting the GST or VAT back

On the accruals basis you reported the GST or VAT when you raised the invoice, so you have paid tax on money you never received. On the cash basis (or the UK cash accounting scheme) you only report tax when the customer pays, so there is nothing to get back: the write-off affects profit only.

Country	When you can claim	How it usually shows in Xero
Australia (GST, accruals)	In the BAS period you write the debt off, or the period you become aware it is 12 months or more overdue	Keeping the original GST rate on the credit note reverses the GST in that period. Your BAS agent may prefer to report it as an adjustment instead
New Zealand (GST, invoice basis)	In the GST period you write it off	Keeping the original GST rate reverses 3/23 of the amount written off: on NZ$4,600 that is NZ$600
United Kingdom (VAT, standard accounting)	Once six months have passed since the later of the due date and the supply date, and the debt is written off in your records	HMRC’s VAT Notice 700/18 says relief is claimed as extra input tax in box 4, not by reducing the VAT on your sales, so the credit note uses No VAT and the VAT is added to box 4 on the return

If the customer later pays some or all of a debt you claimed tax back on, the tax on what you recover is due again in the period you receive it.

A worked example: a builder goes into liquidation

These figures are made up. Dan runs an electrical contracting business in Geelong, registered for GST on the accruals basis and lodging quarterly. In April 2026 he invoiced a builder $6,600 ($6,000 plus $600 GST) on 30-day terms. In September the builder went into liquidation, and the liquidator’s first report says unsecured creditors should not expect anything. On 30 September Dan writes the invoice off.

	Before the write-off	After
Total owed to Dan (Aged Receivables)	48,200	41,600
Of which over 90 days past due	7,900	1,300
Bad debts expense on the Profit and Loss	0	6,000
GST back in the July to September BAS	0	600

What it shows:

1. The real cost is the amount before GST. The $600 of GST comes back through the BAS, so the hit to profit is $6,000, not $6,600.
2. The receivables total finally tells the truth. Before the write-off, $6,600 of the $7,900 in the over-90-days column was money that was never coming. After it, the column shows the $1,300 that is still worth chasing.
3. A bad debt costs far more sales than its size. Dan’s business makes a net margin of about 12%, so replacing $6,000 of lost profit takes about $50,000 of extra sales ($6,000 ÷ 12%).
4. A later recovery reverses part of it. If the liquidator pays 10 cents in the dollar next year, Dan receives $660: $600 goes back to profit (Xero records it as income, often in a Bad Debts Recovered account) and the $60 of GST is due again in that quarter.

For income tax, a bad debt is generally deductible in the year it is written off if the sale was counted as income in the first place. In Australia the write-off has to be made in that income year, so a debt written off on 30 September 2026 falls in 2026–27. New Zealand and the UK have their own rules; ask your accountant.

Common mistakes

• Deleting or voiding the invoice. That removes the sale as if it never happened, which makes past sales wrong, and in a closed GST or VAT period it changes a return you have already lodged. A credit note dated today records the loss in the period it happened.
• Emailing the credit note to the customer. It reads as “you owe nothing”. Approve it without sending.
• Writing off and stopping the chase in the same breath. A write-off is an accounting entry. You can still pursue the debt, and anything you later collect is income.
• Letting dead invoices sit for years. They inflate the Aged Receivables total, make debtor days look worse than collection really is, and hide the GST you could have claimed back.
• Claiming the tax back on the cash basis. You never paid it, so there is nothing to reclaim.

Common questions

How do I write off an invoice in Xero? Open the invoice, add a credit note against it from the options menu, change the account on each line to a Bad Debts expense account, check the tax rate and approve it without sending it. Xero allocates the credit to the invoice, so it no longer shows as owed.

Is a bad debt an expense? Yes. The amount before GST or VAT goes on the Profit and Loss as a bad debts expense, usually among the operating expenses rather than in cost of sales. It reduces profit in the period you write it off.

Can I claim GST back on a bad debt in Australia? If you account for GST on the accruals basis, yes, once the debt is written off as bad or has been overdue for 12 months or more. On the cash basis there is nothing to claim, because the GST on an unpaid invoice was never reported.

How does VAT bad debt relief work? In the UK you can claim back the VAT on an unpaid invoice once six months have passed since the later of the payment due date and the supply date, if you have already paid the VAT to HMRC and written the debt off in your records. The relief goes in box 4 of your VAT return as extra input tax; the Xero VAT return guide explains each box and what to check before you submit.

What happens if the customer pays after I write the debt off? Record the money as income, often in a Bad Debts Recovered account, and if you claimed the GST or VAT back, that tax is due again in the period you receive the payment.

Should I write off small old balances? Yes, once you are sure they will not be paid. Old small amounts, often short payments or bank fees deducted by the customer, clutter the over-90-days column and make it harder to see who really owes you money.

See who is late before it becomes a bad debt

ReportPilot reads your Xero figures and sends a short plain-English email every Monday, with a 24-month dashboard behind it. When customers owe you money that is past due, it says how much and across how many invoices, and names the biggest overdue customers with how many days late each one is, so you can chase while there is still something to collect. It does not write off debts or change anything in Xero: it asks for read-only access. There is a 14-day free trial with no card.