Bad Debt Management
Corporation Tax
Legislation in this area does offer the possibility to make provisions for doubtful debts arising from potential irrecoverable balances.
As with the scenario found within VAT rules, there are a number of conditions to be met in order to obtain corporation tax relief.
Companies can make a provision for specific balances if they are deemed irrecoverable.
A bad debt may be considered irrecoverable if it meets any of the following conditions:
- The balance has been outstanding for at least six months.
- That the debtor has commenced insolvency proceedings.
- That the debtor has been prosecuted for fraud.
- A claim has been pursued by legal proceedings.
Even when the condition test has been passed, there are cases when bad debt provisions are not tax allowable. For instance, if the debt is indeed guaranteed by official means.
In addition to the above, there is relief specific to smaller entities. These are companies that have had an annual turnover figure below 8 million in the preceding tax year.
Legislation applicable to smaller entities allows these companies to make general bad debt provisions for up to 1% of the total debtor balance at the year end. (Of course, excluding any debtor balances provided for.)
In light of the restrictions that may be found with regards to tax reliefs, businesses may also want to explore other tools to enable them to minimise the impact of doubtful debts. There are a number of financial products available, such as:
Debtor’s Insurance
These policies allow companies to guarantee the recovery of their bad debts. In summary, the financial institution, in exchange for a percentage, guarantees a proportion of the debtor balances.
By using this product, the company may release much needed cashflow to adequately manage the operations.
Factoring
This is a contract where by the company foregoes its rights in respect to the debtors to the factoring company, allowing immediate access to the cash at a discounted rate.
With this financial arrangement, turnover generated from either the sale of goods or the provision of services, is granted to the factoring company at a lower value to reflect the value of both the financing element of the arrangement and the credit collection services.