Adjusted Profit Statements for Calculating Corporation Tax (Business Tax)

emsutt5emsutt5 Just JoinedPosts: 3Registered
Good evening,

We have recently covered "Adjusted Trading Profits in Business Tax and I was wondering if anyone could clarify something for me.

How do we treat an increase in general bad debt provision? The Osborne textbook states that:

Any such increase (that is debited to the income statement) must be added back in the computation, and decreases in general provisions adjusted for by deducting from profits. A general provision could be based on a lump sum, or a percentage of total trade receivables (debtors). Increases in specific provisions and the actual write off of bad debts are however allowable.

There is also a table on page 2.9 which says that for increases in general bad debt provisions, you need to add it back to the profit.

However my teacher says that the increase in the general bad debt provision doesn't need to be added onto the Net Profit when we are calculating the Adjusted Profit Statement In Limited Companies.

I'm not sure if I am reading the textbook wrong but to me it seems a bit confusing to me - does anyone know?

Thank you for your help.

Comments

  • readerreader Experienced Mentor Posts: 1,039MAAT, AAT Licensed Accountant
    emsutt5 wrote: »
    Good evening,

    We have recently covered "Adjusted Trading Profits in Business Tax and I was wondering if anyone could clarify something for me.

    How do we treat an increase in general bad debt provision? The Osborne textbook states that:

    Any such increase (that is debited to the income statement) must be added back in the computation, and decreases in general provisions adjusted for by deducting from profits. A general provision could be based on a lump sum, or a percentage of total trade receivables (debtors). Increases in specific provisions and the actual write off of bad debts are however allowable.

    There is also a table on page 2.9 which says that for increases in general bad debt provisions, you need to add it back to the profit.

    However my teacher says that the increase in the general bad debt provision doesn't need to be added onto the Net Profit when we are calculating the Adjusted Profit Statement In Limited Companies.

    I'm not sure if I am reading the textbook wrong but to me it seems a bit confusing to me - does anyone know?

    Thank you for your help.

    When calculating tax adjusted profits I would add back increases in general bad debt provisions to net profit in order to arrive at taxable profit.

    For example, if the net profit was £20k and when I looked at the expenses I saw £1,000 for general bad debt provisions, I would add back the £1,000 to the £20,000 in order to get £21,000 of taxable profits.

    I'm not sure what your teacher is talking about to be honest; you should probably discuss this point with him/her.

    Specific bad debts, i.e. writing off a specific invoice or customer balance (rather than just a % of the trade debtors balance), is allowable and should not be added back.
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