Writing off old debt, tax rebates, etc

[d000hg]

For reasons not worth going into, I have 2 unpaid invoices with a former client outside the EU. They are now just over 2 years old and though the client - a bootstrapped startup - has always strenuously promised their intentions are honourable to pay these back I'm a little tired of the affair.

But the main point of this thread is that corporation tax has already been paid on those invoices. I've asked my accountant/CUK (can't remember which) about this in the past and been told you can annul invoices, but only if you write the client a formal letter saying you are not expecting to get the money.

So my two specific questions, among any other advice or insults I may receive, are:

1. Can CT be reclaimed that has actually been paid on defaulted bills, or have I missed the boat?
2. Does doing this mean the client is officially off the hook? Does my letter mean they can expect not to pay, or only that I am officially telling them I don't expect them to but that they still owe the money?

Other things you might ask about...
- It's not UK/EU so I don't think I can follow the normal "pay on time" stuff
- Similarly engaging a company to chase it up would be very hard
- It's basically a 1-man company, not some corporation trying to pull a fast one
- About £20k.

[Contreras]

But the main point of this thread is that corporation tax has already been paid on those invoices. I've asked my accountant/CUK (can't remember which) about this in the past and been told you can annul invoices, but only if you write the client a formal letter saying you are not expecting to get the money.

I find that hard to believe, because otherwise as you say:

the client is officially off the hook

and

they can expect not to pay

MyCo wrote off a bad debt in the accounts last company year, from an unpaid invoice in the year before that. In this case the client went into voluntary liquidation (and a year later still is in liquidation!). When I received the VL notice I re-submitted the invoice to the liquidators and theory it could still be paid (say a few pence in the £) but as far as MyCo accounts go the debt has been written off - offset against operating profit, so it reduced the CT bill. Also got VAT relief.

Not saying your accountant is wrong of course, would be interesting to see what the professionals here say. I think if my accountant suggested that then I would start by asking for a template letter.

Maybe you were thinking about a Credit Note.? But that's for like refunds or correcting invoicing errors.

[d000hg]

I searched my old posts on CUK pretty thoroughly. Not sure I can post a personal response from my accountant (InTouch) without their permission. But there was definitely something about doing more than just claiming you never got paid.

[stek]

In my accounting days ISTR bad debts and bad debt provisions was one of the things that convinced me that accountants are experts at making adding up and taking away dead hard.

[tractor]

For the VAT (Fom the HMRC site)

When you can reclaim VAT on bad debts

You can reclaim VAT that you paid to HMRC and which you have not received from the customer. The conditions are that:

the debt is more than six months old and less than four years and six months old
you have written off the debt in your VAT accounts and transferred it to a separate bad debt account
the debt has not been sold or handed to a factoring company
you did not charge more than the normal selling price for the items

For the CT

I can't find the specifics (because they keep changing) but ask your accountant about it, basically you claim bad debt relief against the year in which you decide to stop chasing e.g. this accounting year for yourco and justify it with all of the documentation you accrued whilst chasing it.

HTH

[Jessica@WhiteFieldTax]

It used to be a requirement for claiming VAT bad debt relief that a letter was sent to debtor, ISTR that requirements been abolished, a in practice no one complied any way.

I'ld imagine you'd be on vat cash accounting anyway?

No specific requirements for corporation tax, other than being able to show paper trial if necessary - in fact that's more a theoretical issue, as all HMRC can do is add the amount to debtors, thus reversing the write off, and passage of time suggests the write off is correct. QED little for taxman to query; of course it would be different if you were writing the debt off much sooner after you invoiced it.

[d000hg]

To clarify, there is no VAT to reclaim here. CT of approx £4k was paid since at the end of that year, I was more expectant I'd get the money or at least start receiving some payments.

Did I read it right that you cannot get back CT you paid, instead they put it 'on account' for the current year i.e reduce my CT for 2012/13 by £4k?

Since this does not seem to be the same as writing off the debt, what happens if the client then DOES pay up, or you get some money from them, or they agree to installments over a couple of years?

[Craig at Nixon Williams]

If you write off the money as a bad debt in the company's accounts, the value of the write off will reduce the profits of the company which are charged to Corporation Tax. This means that writing off the bad debt will simply reduce your next Corporation Tax bill - if you paid CT at a higher rate (possibly at 21%) in the year that the invoice was originally raised then you may lose out a little as a result.

Hope this helps!
Craig