Kingston Smith

Business Doctor: Unpaid debts can be set against tax

WN writes: I am approaching my company year end and undertaking a review of all the money that is owed to my company. Some customers’ debts are quite old and others are unlikely to be collected. Can I just write these off and will I get a tax deduction?

A customer’s debt will be considered to turn “bad” if you have no reasonable chance of collecting it, writes Jon Dawson, partner at Kingston Smith LLP. This will be where your customer cannot pay — for instance, if it goes into liquidation — or you made all reasonable efforts to collect the money but it was not forthcoming. Where a customer’s bad debt is old and you haven’t done anything to chase it up, you should at least contact the customer and request payment.

The tax treatment is straightforward. Once you believe you will not be paid in full, you can make a provision or write-off in your accounts. This will create a cost to offset against profits. For specific debts, the cost is tax deductible. If, however, you decide to make a general bad-debt provision — a percentage of debts outstanding — this would not be tax-deductible.

If you provide against specific debts, you can also claim back any VAT you have already paid. The debt in this case needs to be at least six months old and the reclaim goes through your next VAT return.

It is down to you to determine the point at which a provision is needed. In the case of a liquidation, it is obvious and you should write down the amount to the payout expected.

In the case of a normal debt, the amounts involved will determine how much time and money you will spend chasing it. For smaller amounts, it would not be feasible to instruct a debt collector or solicitor so you may just chase this yourself.