Bad Debts

[Chatterbox Childcare]

I was asked tonight about bad debts as I don't know the answer. Can someone carify please:

If a parent leaves and does not pay you how do we claim back the non payment and are we able to claim anything extra as a bad debt?

[MaryMary]

That has got me thinking!!

Not sure really. I have done some accounting in the past & I am racking my brains.

If a bank has a bad debt it goes in their accounts - also an increase in their provision for bad debts would be an expense. However, that is money they have lent to a customer, and then not got it back, so it is a loss (expense).

If a parent doesn't pay us, we have not got that income. Surely it can only be put as an expense, if the income was also been included in the accounts, therefore cancelling each other out. Does that sound right? I wouldn't, therefore, put a bad debt as an expense. I would, however, put any expense associated with recovering a debt in my accounts.

Just trying to work it out myself now! HTH :)

[MrAnchovy]

If you mean is there some body that will give you the money that the parent owes you, I am afraid there isn't.

If you mean how can you ensure you don't pay tax on the income you haven't received then you should put the bad debt down as an expense, described as 'bad debts' (NOT provision for bad debts, or bad and doubtful debts which is different and not tax-deductible). Of course this will just go in the same box on the tax return as every other expense.

You should do it this way rather than just not record the income you don't receive because you can still claim the 10% wear and tear (the loved one didn't stop wearing out your furniture just because his parents didn't pay their bill!)

[glitzygal]

SO;;;

can we put a non paying parent/s through as a bad debt, i have had 2 non payers, and i spent the usual on them like the others.

so if you can is it the amount owed, or worked, do you include 4 weeks that they should have payed, as notice...............

where in your books do you put it.....

would it be questioned...........anywhere

[MaryMary]

Good point about the wear & tear, Mr A :) Thank you

(I wasn't suggesting we make a provision for bad debts, BTW - I was just thinking 'out loud' - my background was finance in a bank & I was trying to work it out :D )

[MrAnchovy]

To be clear, you can only put down as a bad debt the same amount you have included in your income, less anything they did actually pay (plus any costs of attempted recovery).

Payment in lieu of notice is income, but it would not be correct to deduct the 10% wear and tear allowance for it (they don't wear anything out when they have left even if they didn't give any notice!) - the actual text of the concession is unclear however so I am going to sit on the fence on this one :D

[mama2three]

Based on that though Mr A we would be unable to put through income we recieve when the child is sick or on holiday , as they are not at the setting and therefore we are claiming wear and tear incorrectly - or am I just confusing myself needlessly?

[TheBTeam]

Interesting cos i have had a bad debt and just didnt put it down as income but it was in the tax year before last, so can i add in and take out in this years accounts?

[Chatterbox Childcare]

If you mean is there some body that will give you the money that the parent owes you, I am afraid there isn't.

If you mean how can you ensure you don't pay tax on the income you haven't received then you should put the bad debt down as an expense, described as 'bad debts' (NOT provision for bad debts, or bad and doubtful debts which is different and not tax-deductible). Of course this will just go in the same box on the tax return as every other expense.

You should do it this way rather than just not record the income you don't receive because you can still claim the 10% wear and tear (the loved one didn't stop wearing out your furniture just because his parents didn't pay their bill!)

Just so that I have this clear in my head; if a parent doesn't pay we still put down what they should have paid us in income to get the 10% wear and tear

where do we put the opposite expense so we don't get taxed on it.

Are we doing this just so we get 10% or can we just put it into expenses without the income and get our profit reduced because of it.

Thanks

[MrAnchovy]

Based on that though Mr A we would be unable to put through income we recieve when the child is sick or on holiday , as they are not at the setting and therefore we are claiming wear and tear incorrectly - or am I just confusing myself needlessly?

You are just confusing things needlessly. Income when the child is sick or on holiday is still income from childminding.

And having thought about it again, although payment in lieu of notice is damages for breach of contract, it is still treated as income from a trade or profession under tax law and your only business is childminding, so this is childminding income.

I started thinking about amounts charged separately for meals, trips out etc - you could argue that an allowance of 10% for wear and tear against these is not fair. But whether it is fair or not, the concession says quite clearly "A deduction of 10% of total childminding income may be made" so that is what you are entitled to take - there are plenty of things in tax that work against you unfairly, so don't feel guilty when it works in your favour.

I don't usually stay on the fence for long :D

[MrAnchovy]

Interesting cos i have had a bad debt and just didnt put it down as income but it was in the tax year before last, so can i add in and take out in this years accounts?

If you do this it would probably be a good idea to explain what you have done in the 'other information' box on the tax return:

"Turnover shown under self employment includes £xxx which accrued in Somewhenber 2009 but was not received from the client. Total allowable expenses includes the same sum as a bad debt expense."

[MrAnchovy]

Answers in bold:


Just so that I have this clear in my head; if a parent doesn't pay we still put down what they should have paid us in income to get the 10% wear and tear
YES


where do we put the opposite expense so we don't get taxed on it.
It all ends up in the 'Total allowable expenses' box on your tax return so it doesn't really matter. If you want a description for your accounts, it is 'Bad Debt Expense'. If you put your expenses into separate boxes on the tax return because your turnover is over £68,000 it should go in 'Other allowable business expenses'


Are we doing this just so we get 10% in practice yes, although it is also technically correct to do it this way (and incorrect to just ignore it) or can we just put it into expenses without the income and get our profit reduced because of it.Er, no :D

Thanks

[Chatterbox Childcare]

Answers in bold:

Thank you - do we need any proof of this "bad debt" or does the HMRC just take our word for it? I only ask as I only have an unpaid invoice to back me up

[Pauline]

If you mean is there some body that will give you the money that the parent owes you, I am afraid there isn't.

There is if you are with Morton Michel, depending on your contract etc. they will pay you the debt and then take on the parent themselves. Sarah knows more as she has been through the experience. :)

[MrAnchovy]

There is if you are with Morton Michel, depending on your contract etc. they will pay you the debt and then take on the parent themselves. Sarah knows more as she has been through the experience. :)

Thanks Pauline, I was only thinking of general funds provided by government that anyone can apply to after the event. Many businesses insure their debts in this way, and I forgot that MM provide this service for childminders. Of course if MM or anyone else gives you the money, you haven't incurred any expense :D

[MrAnchovy]

Thank you - do we need any proof of this "bad debt" or does the HMRC just take our word for it? I only ask as I only have an unpaid invoice to back me up

The proof is the fact that your accounts show the income but there is no record of the receipt from the parent. If HMRC come to visit you this is going to be easier to show if your receipt records are in good order, so make sure they are :)

[TheBTeam]

The proof is the fact that your accounts show the income but there is no record of the receipt from the parent. If HMRC come to visit you this is going to be easier to show if your receipt records are in good order, so make sure they are :)

But surely we should only record income as money we have actually been paid, if we have not been paid it then it is not income?

A shop doesnt put down income for something i use but dont pay for. If i havent been paid it i would be a little uncomfortable showing it as income because where is my proof that i never received it, not being in my bank account would prove nothing, as i could have spent the cash etc.

I can see the logic of not losing out on the actual expenses incurred by caring for the child and to some extent an entitlement to 10% for wear and tear which the child is also going to have caused, but to put income not physically received I think is asking for trouble and would be very difficult to prove that you havent had it.
A lack of receipt or a 'letter' to the parents i dont think would be good enough, given that most of us do our own accounts and a lot is based on trust and good faith, this might still be hard to prove.

[MrAnchovy]

But surely we should only record income as money we have actually been paid, if we have not been paid it then it is not income?
Not true. Income is recognised as it is earned, not when it is received.

A shop doesnt put down income for something i use but dont pay for
Shops don't usually let you take posession of things before you pay for them, but if they did, that is exactly what they do.


HMRC's view on this is here (http://www.hmrc.gov.uk/manuals/bimmanual/bim31115.htm), but the principles they refer to there aren't just HMRC policy, they are fundamental principals of Generally Accepted Accounting practice, or GAAP, under which all accounts (for general use) are prepared.

[MrAnchovy]

to put income not physically received I think is asking for trouble and would be very difficult to prove that you havent had it.
A lack of receipt or a 'letter' to the parents i dont think would be good enough, given that most of us do our own accounts and a lot is based on trust and good faith, this might still be hard to prove.

Believe you me, if HMRC come to call it is income that you HAVEN'T recorded that they will be looking for. They will look at all sorts of things to make sure you put everything through your books and are not taking cash in hand. The stakes here are really high - false accounting carries a maximum penalty of 7 years imprisonment.

[TheBTeam]

Believe you me, if HMRC come to call it is income that you HAVEN'T recorded that they will be looking for. They will look at all sorts of things to make sure you put everything through your books and are not taking cash in hand. The stakes here are really high - false accounting carries a maximum penalty of 7 years imprisonment.

Yes I understand about income and am fully aware of the need to be careful when adding income from other sources into my accounts and trust me i record every penny, but it is the full meaning of the word income, yes i have heard before that income is treated as when earned not received, so will look at the bad debt i have.

What about a family that should have given you notice but because the mum was dismissed instantly you let her go without it and didnt charge, this i presume is slightly different to actually caring for the child and then not being paid?

[MrAnchovy]

Yes that's different, if you decide not to charge a fee in lieu of notice then you don't have any income and there is no debt to write off.

[TheBTeam]

If you do this it would probably be a good idea to explain what you have done in the 'other information' box on the tax return:

"Turnover shown under self employment includes £xxx which accrued in Somewhenber 2009 but was not received from the client. Total allowable expenses includes the same sum as a bad debt expense."

Yes I will do this i think cos a full tax year is enough if they were going to pay!:mad: