infosheet Bad Bebt      Return to menu
     
   Introduction    You will probably first learn that you have a bad debt when you receive a notice from an insolvency practitioner informing you that your customer has entered into some kind of insolvency arrangement.

The other way is when you read a notice in your local newspaper inviting creditors of your customer to make themselves known, and attend a creditors' meeting.

Whichever way the news arrives, it will be unwelcome. Unless your debt is secured, you will be extremely unlikely to see any of the money owed to you. Even if you do see a few odd pence in the pound, it will not be for many months.

If the customer has become insolvent there may be little you can do to recover your moneyOn this basis you should decide what you are going to do about it.

Although it may be a little late on this occasion, you may find our infosheet on how to minimise the risk of bad debt useful reading. It may just prevent the next bad debt.
  

What will happen after one of your customer becomes insolvent

    The first step is to consider the impact of the bad debt on your own business. If the knock-on effect is going to cause you severe cashflow problems, then start addressing the problem straight away. Too many individuals ignore a pending financial crisis, until it is too late to do anything constructive about it.

Next, you should take the time is to ensure that the insolvency official is informed of the precise amount and nature of your debt. Your voting rights at any subsequent creditors' meeting will be determined by the size of your debt. There is always a remote chance that you may receive some level of compensation over the course of the procedings, based on so many pence in the pound. So it makes sense to ensure your full debt is recorded properly and accurately.

If your terms of trading include a notice that you retain title to the goods until they are paid for in full, make sure you attempt to repossess them without delay. It is not unusual to meet resistance from the insolvency practitioner, even if your claim is good. If the value of the goods warrant it, take legal advice and pursue your claim rigorously. If you do not succeed in the first few weeks of the insolvency, then your chances of recovering your goods rapidly diminishes as time moves on.

At some stage you, or your proxy, will be invited to attend a creditors' meeting. At this meeting you will be informed of how the insolvency came about. The current financial position of the insolvent business. The forecast funds that will be raised by realising the assets of the insolvent business or individual, and the way they will be distributed amongst the creditors. At the meeting, the creditors will be either asked to accept or reject any proposals laid before them. In the case of a liquidation, the creditors and members will be asked to vote in a liquidator.

The size of your debt will probably determine whether you feel inclined to attend the creditors' meeting or not. Notwithstanding the meeting is held for the sole benefit of the creditors, it is worth bearing in mind that unless you can marshall a majority vote, you might have an opportunity to ask questions, but to all intents and purposes you will be nothing more than an interested spectator. A cynical view it may well be, but you may consider you can put your time to more constructive to use.

   Accounting for bad debt    You will be able to make a 'specific bad debt' provision in your accounting records that will effectively reduce the reported turnover (profit and loss account) and the amount recoverable in your sales ledger account (balance sheet).

Should you be tempted to raise a credit note to cancel the bad debt. Don't! For specific bad debt provision will be allowed for business tax purposes. The next section explains the procedure for reclaiming any output VAT you may have paid over when the sales invoice(s) were raised in the first place. If you raise a credit note to cancel the bad debt, you will not fulfil the requirements laid down by Customs and Excise. As a result you may lose your right to relief altogether.

Claiming bad debt relief for VAT

You can make a claim for bad debt relief on the VAT, only after six months from the later of the date payment was due, or six months from the date of supply. There are no exceptions. For further information see our factsheet on VAT and bad debt relief. If your turnover is less than £350,000 per year then make sure you take advantage of the cash accounting rules. It avoids the complications of recovering VAT on bad debt.