Our latest hints and tips on bad debt write offs for Sage 50 accounting software users
If you sell goods or services under the standard VAT or UK Flat Rate VAT Scheme you will have declared and paid output tax to HMRC by reference to the date of supply. If your customer then fails to pay some or all of the amount charged, you can reclaim the VAT charged as ‘bad debt relief’ subject to the following conditions:
- The debt must be more than 6 months, but less than 54 months old;
- You must have written the debt out of your customer ledger and transferred it to a separate bad debt account;
- The debt has not been sold or handed to a factoring company;
- You did not charge more than the normal selling price for the goods or services.
If you satisfy all of the above criteria and have documentary evidence that you have tried to collect the debt, you are entitled to recover the VAT (proportionate to the unpaid amount).
Enter a customer credit note; current date; reference ‘bad debt’; nominal code 8100 (bad debt write-off); total value in ‘net’; tax code ‘T9’, VAT amount nil:
Once you have written the debt out of your customer ledger, you need to enter a journal to claim bad debt relief. VAT is calculated in proportion to the unpaid amount (based on 20% : £1,200 x 20/120 = £200). Using the same date as for the credit note, claiming the relief through input tax (per HMRC) nominal code 2201:
Finally, remember to match the credit note against the unpaid invoice(s) in customer receipts.
Note: If you operate under the UK cash accounting scheme, bad debt relief is not appropriate. You will only pay VAT by reference to when your customer has paid you.