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Bad debt equals good tax deduction

In these difficult times bad debts are a big problem. If you don’t keep a watchful eye on them your company might be paying Corporation Tax on income it will never receive. How can you formulate your claim for a tax deduction for maximum advantage?

How is relief given?

When you make a sale this counts as income for your business even if you don’t get paid. But to compensate you can claim a debt that’s gone bad as a business expense. The amount claimable is the unpaid sum excluding any VAT.

Example. In its draft accounts for 2012 Realistic Ltd had a taxable profit of £100,000. This is subject to CT at 20%. It included a deduction in its accounts relating to a debt of £12,000 (including VAT) which it believed it would not get paid for. This reduced its CT bill by £2,000 (£12,000 less VAT £2,000 = £10,000 x 20%).

Lost time is lost tax

Unless you identify bad debts and claim a deduction for them, it means that you’ll have paid tax on sales for which you’ve received no money. That’s just handing over your cash to HMRC for nothing. We’ve seen businesses that have been out of pocket for years because they haven’t made a proper review of their debtors at the end of their financial year.

Specific provisions

The initial hurdle is identifying debts you can claim for. You’re not allowed to make a general estimate, even where you have many low value transactions which you know will result in some bad debts. Each and every debt has to be considered.

Many a mickle...

You must make a reasonable and proportionate attempt to recover the money you’re owed. If it’s a small amount, say £25, the Taxman won’t expect you to have sent dozens of chasing letters. But you will need to have made at least some attempt to pursue payment. Conversely, where large sums are involved you need to have exhausted all reasonable avenues, right up to the point of taking court action, if appropriate.

Hindsight can speed up tax relief

Even where a debt appears good at the end of your accounting period, HMRC will accept a claim for relief if it’s subsequently gone bad.

Example. Acom Ltd’s year-end is December 31 2013. It issued an invoice for £2,000 (ex VAT) on November 30. On Januay 31 2014 the customer goes bust and there’s no expectation that Acom will get paid, and so it can claim bad debt relief in its accounts to December 31 2013.

Tip. Maximise tax relief for bad debts. Before you sign your annual accounts make a final review of all the trade debts included. You may not have been aware that the debt was going bad then, but subsequent events may show it is

If you would like more information, don't hesitate to contact us on 0191 386 4786 or email us

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How can we help?

We are a proactive firm of accountants who can assist you in all your financial needs in a friendly, efficient and professional manner.

Building partnerships, listening to your needs, and implementing a solid financial strategy is the backbone of our practice. 

Why work with us?

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