In most cases, property rental income must be brought into account in the year in which the income was earned, even if the invoice has not yet been paid. However, a deduction is allowed in respect of bad & doubtful debts.
These are debts which are either clearly irrecoverable (a bad debt) or a doubtful debt to the extent it is estimated to be irrecoverable. The deduction allowable for a doubtful debt is the full amount of the debt, less than any amount the taxpayer expects to recover.
Whilst HMRC does not usually seek proof of each bad debt for which a claim is made, it is clear that a deduction can only be made where a taxpayer has taken all reasonable steps to recover the debt and proper evidence should be held to demonstrate this.
If the debt is later recovered the taxpayer should account for the recovery as a receipt of their rental business in the year the debt is paid. Similarly, if a doubtful debt later looks as if it will be paid at some future date, the taxpayer should bring the debt back in as a receipt when prospects change.
No deduction is allowable if a debt is waived for reasons other than the financial position of the debtor, for example between connected parties or merely because the tenant is a habitual slow payer.