Make sure you get the tax relief on any bad debt….
Author: Russell SmithAugust 20, 2015
You’ve won a customer, you’ve done the work, you’ve sent the invoice and then you HAVE NOT been paid.
You then find out that your customer has gone bankrupt and you realize you are not getting your money back – you have a bad debt.
There are many ways to avoid this situation which I will blog about in the next few days but let’s imagine you are in this situation now.
There’s two thing from a tax perspective – firstly, VAT, secondly, writing bad debt.
Let’s suppose your customer owes you £1,000 + VAT = £1,200.
You need to write this debt off in your accounts. This will cancel out the £200 VAT that is in your VAT return and put the £1,000 as an expense which will reduce your corporation tax by £200 (20% corporation tax on your profits).
So it goes from a £1,200 problem to a £800 problem (£1,200 less the VAT of £200, less the corporation tax of £200).
Still bad, but not as bad as it was.