Bad debt adjustments

I have recently found out that one of my customers has been declared bankrupt. Unfortunately, I invoiced them four months ago for £1,000 plus VAT of £175 and this is still outstanding at my year end of 31 December 2010, so there is a good chance I won’t receive this and will need to write it off. How do I account for this in my accounts and what income tax relief can I get? And what do I do about the VAT?

1st April 2011

As the debt is only possibly irrecoverable at this stage you may only ‘provide’ for the debt. You will therefore reduce the amounts owing to you at 31 December by £1175.

For income tax purposes, the doubtful debt expense of £1,000 is allowable because it is specific and therefore written off in the profit and loss account.

Provided that you have paid the VAT over to HMRC, you can reclaim VAT that you paid and which you have not received from the customer, provided that either the Official Receiver has notified you that no monies will be forthcoming or the debt becomes six months old or more.

You add the amount of VAT you are reclaiming to the amount of VAT you are reclaiming on your purchases (input tax) and put the total figure in Box 4 of your VAT Return.

If you cash account for VAT, you will never have paid the VAT over to HMRC and therefore, you are not due a refund from HMRC. You will merely need to do the accounting adjustment above.

If you would like more information of the treatment of bad debts, please contact your local TaxAssist Accountant.

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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