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
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