What to do When a Customer Goes Bust

Newsletter issue - November 2009.

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 have paid 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.

What our clients say about us...

  • "Paul has provided accountancy services to my company for 2 years now. I can recommend Paul very highly; his skills as an accountant are highly detailed and professional and he is always available to provide advice. One aspect of the way Paul works that I greatly appreciate is a preference to meet face to face when there is a detailed conversation to be had. I personally find this more productive and is a benefit of working with a small accountancy firm that you wouldn't get with the large faceless providers."

    ALISTAIR FAIRWEATHER - PROGRAMME & PROJECT MANAGER, DELIVERING/RESCUING I.T. 7 BUSINESS CHANGE WITH BUDGETS UPTO £50M INC SUPPIER MANAGEMENT

  • "I couldn't ask for more from Paul as an Accountant. Paul has been accountant to Work Relief Charity Recruitment for just over a year now and is proving an invaluable asset. Accurate, knowledgeable, flexible with an emphasis on service delivery, I would recommend Paul's services to any organisation looking for an accounts professional."

    Neil Price - Managing Director at Work Relief Charity Recruitment

  • "Paul was a referral from a family member when I started my business 2 years ago. As this was the first time I had ever run my own company I was totally clueless over the financial side of matters and was worried that I may have made mistakes in any of my accounting. I needn't have worried as after enaging Paul for a set monthly fee he was always there on the end of the phone for all sorts of questions I had and no matter how trivial they were Paul gave me all the information I required and more and did an excellent and painless job at the end of my first year! Couldn't ask for any better to be honest. Just two words - hire him!!!"

    Lee Westrap MBCS - Director - Bulldog IT Services

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Booth & Co  |   The Hermitage  |   15a Shenfield Road  |   Brentwood  |   Essex  |   CM15 8AG        Telephone: 01277 224666    |   Email: info@boothandco.co.uk