Bad Debt Provision

peaman

A client has sent me a list of trade debtors at the year end, many of which have been highlighted 'Bad' or 'Doubtful'.

I am OK with the bad debts, I will just write them off (CR trade debtors / DR profit & loss) and they are allowable for tax.

It is the doubtful debts I am unsure of. When I took my AAT exams (many years ago), the movement in the bad debt provision in the P&L was not allowable for tax. However, I have read conflicting things on the web. Some people say that they are still not allowable against tax, some people state that they are now allowable 'due to recent changes in legislation'.

I am not including a general provision (i.e. a % of o/s debtors), the doubtful amounts are all in respect of specific debts. Does this make a difference?

stevo5678

I dont see an issue (in claiming relief) as it is a specific adjustment and not a general provision as long as you reverse the effect next year if they come good. As long as the client thinks it is 'probable' that they will be bad.

peaman

Thanks Stevo. I was thinking along the same lines.

Another problem is that the list of 'doubtful' debts they have given me is so big it will create a loss, and if they are eventually paid and reversed next year they will greatly increase next years profits.

I have advised the client of the above and asked them to have another look at the list and amend.

I was thinking of possibly including a percentage of the doubtful debts instead as a 'general provision', so not sure if this would be allowable against tax.

Monsoon

Bad debts allowable.

Specific doubtful debts allowable.

General doubtful debt provision not allowable for tax.

If its going to make a loss then yes, you really do need to look at whether it's really doubtful or not.

deanshepherd

What's the year end?

If it is, say April, and you are preparing accounts now then if those debts have not yet been paid then I would be perfectly happy providing for them to create a loss. If it is not beneficial to have a loss then don't provide for them.

peaman

Thanks Monsoon, that is what I remember from my studying, but I wanted to check that the rules re- general provisions have not changed, because I have seen a few things like this on the web...

Section 35 ITTOIA 2005 states that bad debt provisions are
allowable for tax purposes if the debt is bad or is estimated to be bad. In the past, general
provisions for bad debts would have been disallowed whilst specific provisions would have been
deductible for tax purposes. Following the case of Herbert Smith v Honour 1999 STC 173 and
the withdrawal of Statement of Practice 3/90 which prohibited the anticipation of future losses,
Sch 4 FA 2005 introduced amendments to reflect the terminology used in International Financial
Reporting Standards which refer to assets being written down to recognise any impairment, and,
it could be argued, this can apply to general bad debt provisions

However, the client has provided me with a revised debtors list and it looks like the P&L will now show a small profit.

Y/E is march, so yes I can write off losses, but I was worried about next year if they were finally paid, plus I wasn't sure what the client was going to use the a/c's for (i.e. obtain finance) and didn't want to show a loss if it would cause problems. But the client is not concerned what the accounts look like so all is good.

Thanks all.