What To Do When A Customer Goes Bust

In these troubled times the failure of one business can have a
knock-on effect on its suppliers. If one of your customers goes
down you need to quantify the bad debts created by that failure
as soon as possible.

Say your accounting year end is 30 June 2009, and one of your
customers fails in October 2009 leaving the sales invoices it
received in April, May and June all unpaid. Where it is clear
that you will not receive payment from the liquidators or
administrative receivers of that business for those sales
invoices, you can include the bad debt built up between April and
June 2009 in your accounts to 30 June 2009. This applies as long
as your June 2009 accounts have not been finalised by the time
you receive confirmation of the bad debt. Any sales made to this
customer between July and October 2009 will need to be written
off in your accounts to 30 June 2010.

This is a clear example of business failure, but bad debts can
also arise where your customer is still trading. Before we
finalise your accounts to submit them to the Tax Office or to
Companies House, we need you to undertake a thorough check of all
your sales debts. Where you can identify specific debts that are
unlikely to be paid, and you have made every effort to recover
the money due, those amounts need to be written off in your
accounts. This will reduce your taxable profits, and avoid you
paying tax on money you are very unlikely to receive.

VAT on bad debts can only be reclaimed six months after the due
date for payment for the invoice. You must also pay over the VAT
due to the VATman before it can be reclaimed. If you use the cash
accounting scheme for VAT you automatically get relief for unpaid
sales debts, as you do not account for the VAT due until the
sales invoice is paid. Any business with a turnover of under
£1.35 million can join the cash accounting scheme.