Bad debts and CT

[Friendly Accountant]

Bad debts

If you don't believe that you are ever going to get paid, you can provide for the bad debts in your accounts and not pay tax on these amounts.

If you think you will eventually get paid, the income stays in your accounts and you do pay tax. Obviously there is a degree of judgement here and as long as you can demonstrate that you had good reasons for writing off the debts you shouldn't have a problem with HMRC.

As xoggoth says, if you ultimately do get paid, the amounts come back into income at that time.

You may also want to consider the VAT position on these. There is a specific time test for claiming VAT back - if the debts are over 6 months old, you don't think you will be paid, and you write the amounts off in your accounts, you can claim back VAT previously paid to HMRC in respect of those invoices.

[xoggoth]

Unfortunately, slow paying is often a sign of a company in trouble for obvious cash flow reasons. I would be wary of supplying more goods/services to them.

Our bad debts have been very small previously but I suspect one "slow payer" is about to go under owing us quite a few hundred, as we have been told their shop has closed. When I was contracting I lost about £1500 when a consistently "slow payer" went into receivership.

"On its own" is important I think. It is not just about time but effort one is supposed to put in to trying to recover money. If one has phoned, written letters requesting payment and they have had no result.

[VectraMan]

Thanks for the advice. This would appear to be relevant:

http://www.hmrc.gov.uk/manuals/bimmanual/BIM42710.htm

Slow payers
If the debtor is habitually a slow payer, and there are no grounds to believe his financial position has changed, then we would not accept that the length of time a debt has been outstanding is on its own sufficient reason to regard it as doubtful. A provision made on these grounds cannot be considered as being ‘estimated to be bad'.

The client in this case has been a slow payer from day one, so it seems the continuation of slow paying isn't enough justification.

But I'm sure Xoggoth is also correct in saying it's unlikely to be challenged as long as you're reasonable about it.

[xoggoth]

Accruals is normal but if there is genuine uncertainty if it will be paid I see no reason not to write it off, you can always put it back later if you get it.

In my plan B company I put a note to the accounts on writing off policy and the amount written off. It is also explicitly shown as a deduction in the non statutory long profit and loss at the end which you can format how you like.

If the taxman wants to challenge it he can, he hasn't yet.

[ASB]

Yes that was my understanding, and everything I've read on the subject suggests that is the case. I found somewhere on the web an HMRC document talking about considering a "cash accounting" scheme for CT for small business, but it doesn't seem to have happened. In this case I'll have to pay out more than half of the company funds in CT, but you can see in extreme cases how the lack of cash accounting for CT could cause a small business to completely run out of cash even though technically they're profitable.

This might help.

http://www.howto.co.uk/business/book...oubtful_debts/

It does sort of imply you can post it to a liability account as soon as it becomes doubtful. If it becomes "unbad" at some point you simply post it back - increaing profit in that year.

From the horse mouth, but it's a fair bit to wade through.

http://www.hmrc.gov.uk/manuals/bimmanual/BIM42700.htm

[VectraMan]

To clarify what Malvolio said I think he is entirely wrong. Your accounts are prepared on an accruals basis thus all invoices produced are counted - as should be any work in progress.

Yes that was my understanding, and everything I've read on the subject suggests that is the case. I found somewhere on the web an HMRC document talking about considering a "cash accounting" scheme for CT for small business, but it doesn't seem to have happened. In this case I'll have to pay out more than half of the company funds in CT, but you can see in extreme cases how the lack of cash accounting for CT could cause a small business to completely run out of cash even though technically they're profitable.

[ASB]

To clarify what Malvolio said I think he is entirely wrong. Your accounts are prepared on an accruals basis thus all invoices produced are counted - as should be any work in progress.

This does cause a problem in that you are going to be paying CT on the outstanding amounts of notional profit (the invoices are a current asset). However you can get relief when the debt is eventually written off. There is a process available to enable you to take a charge against bad or doubtful debts, but what constitues due diligence in this case is unknown to me. [This would then give the outcome Malvolio said]

Since you don't want to ask an accountant you could try HMRC. You can sometimes get quite a lot sense out of them.

[malvolio]

CT is paid on profit. If you haven't had the income, you haven't made a profit, so there's no CT to pay. You carry the bad debt across into next year, if it's paid then fine, it it isn't you again reduce your total profit by that amount.

There are, however, other technical considerations about how long you do this and some other imapcts (bad debts are technically an asset). So sorry, but you need an accountant...

[VectraMan]

This is for PlanB co, and PlanB co cannot afford an accountant, so please don't suggest asking one ;-)

I have to do a CT return, which as I understand it is based on the amount invoiced, not the amount that's been paid. But in this case there are quite a few invoices unpaid from the one near-death client, and I'm not at all confident of ever seeing the money.

Presumably if the client had gone bust, then I'd be okay to write off those invoices as bad debts and not pay the CT. But is there some kind of minimum stage where I can treat the debt as bad? E.g. if unpaid for 6 months can I treat it as a bad debt, and then what happens if the client does eventually pay up?

I understand I will eventually get the CT refunded even if I pay what turns out to be too much for this year.

Thanks for any words of wisdom.