Write-off bad debt and claim bad debt relief to avoid paying tax on income that you have not received.
Most businesses will eventually encounter a non-paying customer, especially during today’s difficult economic climate.
Bad debts can be very damaging to businesses of all shapes and sizes, so it’s important to minimise your losses by claiming tax relief on your bad debts to ensure that you do not end up paying tax on income that you have not received.
Why write off bad debt?
It is important to write off bad debt that you are sure is never going to paid to ensure that your business’ turnover as stated in your accounts is accurate. The higher your turnover, the more income tax you will be due to pay. Writing off bad debts ensures that you are not paying income tax or corporation tax on amounts that you are never going to receive.
You can write off bad debt providing you have made a reasonable effort to collect the debt and you have evidence that the amount is irrecoverable. Evidence may include:
- Copies of emails and letters.
- Communications with solicitors or banks.
- Documentation about any legal action taken.
- Reports about the customers financial situation.
When can VAT be reclaimed on bad debts?
If you have paid VAT on the sale of services or goods which you then never received payment for, then you can reclaim this from HMRC providing it has been 6 months since the payment’s due date. This is called ‘bad debt relief’.
HMRC sometimes investigates bad debt claims, so it’s important to keep records and evidence of the bad debt and all communications, accounts and documentation relating to it for four years from the write-off.
Bad debt relief should be claimed on your VAT return.
If you require help with credit management, arrears prevention or debt collection, get in touch with our team of experts here at Churchill Recovery by calling us on 0333 320 0748.