Bad Debts & Taxation
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I have been asked if it makes a difference for corporation tax purposes how you treat an amount written off.
Eg if we agreed to write off a customer balance as a gesture of goodwill we usually just enter a sale credit to cancel the invoice. Can this be classified as a bad debt, and does it make a difference for tax?
I was under the impression it was only a bad debt if we had chased the money, and then decided to write it off as there was no hope of recovering the debt.
I also know that you have to wait 6 months before reclaiming the VAT on the bad debt.
One of my bosses has heard (in the pub no doubt) that it is more beneficial to write off the balance as a bad debt.
Eg if we agreed to write off a customer balance as a gesture of goodwill we usually just enter a sale credit to cancel the invoice. Can this be classified as a bad debt, and does it make a difference for tax?
I was under the impression it was only a bad debt if we had chased the money, and then decided to write it off as there was no hope of recovering the debt.
I also know that you have to wait 6 months before reclaiming the VAT on the bad debt.
One of my bosses has heard (in the pub no doubt) that it is more beneficial to write off the balance as a bad debt.
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Re:Bad Debts & Taxation
If a debt is written off as a bad debt though the company has not ceased to trade nor has any attempt been made to chase the debt i.e. it is written off as a gesture of goodwill, HMRC could argue it would not normally be allowable for tax if classed as a "bad debt". However, as it is a specific item, this may be arguable - note I say specific item rather than a specific bad debt as it isn't really a bad debt in the usual term. If you were to write the debt off, you could consider just issuing a credit note as a debit to sales rather than to bad debts as this is simply a case of issuing a credit note against the original debt, in which case this would usually be ok.
The reason I say this is that the Revenue have made this area quite rigorous over the last few months and I recently had a case where a client had written off a bad debt which I had allowed for CT purposes. However, the Inspector opened an enquiry and requested copies of invoices, who had made the decision to write off the bad debt, the circumstances at how the decision had been arrived at and copies of correspondence from the official receivers. Luckily, this documentation was all legitimate and the debt was allowed in the end though this goes to prove that they are clamping down on this area and if my client had not had the official documentation, then this would have almost certainly been disallowed.
The six month rule does apply to specific bad debts in terms of VAT legislation.
Regards
Steve0