Bad Debts

If the recessionary trends continue we are all likely to face bad debts. It is well worth spending some time to sharpen your credit control procedures, we can certainly help you do this. This article offers a few pointers which will ensure you deal effectively with the VAT and tax consequences.

VAT

Unless you are registered to use a special scheme which protects you from bad debts, particularly Cash Accounting, you may have paid over the VAT on sales invoices issued as part of your VAT return. Subsequently you may have been unable to recover the VAT from your customer.

If that is the case you are entitled to reclaim the VAT when the debt is 6 months overdue.

In passing it is well worth converting to Cash Accounting for VAT if your business qualifies. Presently the turnover limitations are £1.35m per annum. If your annual turnover is under this amount registering would provide a possible positive effect on your cash flow. Again we can help if you would like to consider this.

Tax

Whether your business is incorporated or not, if a customer does not pay your invoice this needs to be recorded in your accounts. Trade debtors should be reduced and transferred to a bad debts account. (Adjusted for VAT if you are registered.)

When you provide us with your accounts data for the current financial year, make sure you provide a list of all the debts you have identified as possible write off's. As long as any claim for bad debts is based on real, specific transactions they should be accepted by HMRC. What you cannot do is transfer an arbitrary percentage of total debts to a bad debts reserve and claim this as a tax write off.