Bad Debt write-off in a different tax year

[JulieR]

Hi all,

I've searched the forum regarding bad debt write-off and from what I understand you record the income as if it was received and then write off the bad debt after 6 months have elapsed.

The bad debt was incurred last November and was a result of a parent going into hospital and ultimately being unable to work. I am not chasing this debt and will be writing it off this tax year. The debt is close to 4 figures.

However due to the changes in personal allowances I am forecasting that this year I may not incur any income tax, whereas for my tax return last year my income was above personal allowance.

My predicament is that I will effectively pay 20% income tax on this bad debt, but not receive the same relief back this year. I have not yet filled my tax return for 2011/12.

Can I claim a refund of taxes paid from previous tax years for the bad debt as that is truly why the tax was paid in that year - any advice from Mr A or any others would be greatly appreciated.

Julie

[ajc]

Hi, apologies if I have missed something, but why was the bad debt included in your income if you did not receive it and why have you paid tax on it? sorry if im being a bit thick.

[JulieR]

Hi, apologies if I have missed something, but why was the bad debt included in your income if you did not receive it

Income is recognised when the service has been provided not when payment is received. See here. (http://www.hmrc.gov.uk/manuals/bimmanual/bim31115.htm)

I think this approach is to cover when two people make an arrangement to pay for goods or services with services provided by the other party -- for example cases where no monetary payment is received at all.


why have you paid tax on it? sorry if im being a bit thick.

I have not yet paid tax on it, but after I submit my tax return later this year I will have a tax bill to pay. In the coming tax year it looks as though I will not have a tax bill as a result of larger personal allowance and smaller number of minded children.

Julie

[Chatterbox Childcare]

I didn't see anything saying 6 months - I would put it into your account for 11/12 and the bad debt in the same year as that is what it was for.

[blue bear]

Hopefully mr a will answer properly but if you provide a service and not charge for it ( if you not chasing surely that's what you have done) how can you include it as an income on your tax return?

[cathtee]

I thought we only pay tax on money we have received, if we haven't had it then surely it's not in our income:confused:

[MrAnchovy]

You are absolutely right that you should record income for the work that you do when you do it, not when you are paid for it.

However there is no rule about waiting six months before writing off a bad debt (I think you may be confusing this with VAT relief that is available for bad debts that is irrelevant here).

For income tax purposes, a debt is written off when it becomes reasonably certain that it will not be recovered. From the facts you have given it sounds as though the position on 5 April 2012 was exactly that, and so you can enter a bad debt expense for the sum in 2011/12 - note you include this in your expenses, you do not reduce your income so you still have the 10% wear and tear allowance.

[JulieR]

Hopefully mr a will answer properly but if you provide a service and not charge for it ( if you not chasing surely that's what you have done) how can you include it as an income on your tax return?

At the time of doing the work, I did so with the full belief that I would be paid for it. Ultimately I chose not to chase a parent for money when they were still in hospital over one month later. Can't get blood from a stone etc.


You are absolutely right that you should record income for the work that you do when you do it, not when you are paid for it.

However there is no rule about waiting six months before writing off a bad debt (I think you may be confusing this with VAT relief that is available for bad debts that is irrelevant here).

For income tax purposes, a debt is written off when it becomes reasonably certain that it will not be recovered. From the facts you have given it sounds as though the position on 5 April 2012 was exactly that, and so you can enter a bad debt expense for the sum in 2011/12 - note you include this in your expenses, you do not reduce your income so you still have the 10% wear and tear allowance.

Mr A - this is perfect, many thanks.

Julie