You can make deductions from taxable profits for bad debts but you can’t just estimate the overall value of debts you don’t expect to be paid, according to Stockport accountants, IN Accountancy
Chasing debts
In addition you have to have made reasonable effort to chase the money you are owed.
HMRC deems the effort should be proportionate to the amount owed. So while a couple of chase letters would be sufficient for £50, HMRC expects you to have used a debt collection service for or sought redress in the courts for debts around the £10,000 mark.
Timing bad debt relief
The timing of bad debt claims is important. You should establish if it is a bad debt in the same accounting period as you issued the invoice. This ensures your company won’t be taxed on unpaid bills.
To do this you need to review your debtors often and not just at the end of the financial year. Having a timetable for reviewing your debts can help your case if HMRC challenges your claim that a debt is bad.
Finally it is sensible to ask your accounts department to make a final check on the status of debtors shown in the accounts before you sign them off.
For expert advice about timing bad debt claims and rules associated with this topic, email sarah@in-accountancy.co.uk or ring 0161 456 9666.
