Contractors’ Questions: Can my PSC write-off debt tax-efficiently?

Contractor’s Question: If my personal services company has old debts and I’m very unlikely to be able to collect these debts from clients and agents, should I just write them off? And if I do, can these bad debts be set against tax?

Expert’s Answer: Firstly, where a customer’s bad debt is old and you haven’t done anything to chase it up, you should at least contact the customer and request payment.

But once you are definitely sure that you will not be paid in full, the tax treatment is straightforward. You simply make a provision or write-off in your accounts. This will create a cost to offset against profits. For specific debts, the cost is tax deductible. If, however, you decide to make a general bad-debt provision — a percentage of debts outstanding — this would not be tax-deductible.

You can also claim back any VAT you have already paid, but only if you have written off the debt in your accounting records. In such an instance, the debt needs to be at least six months old and the reclaim goes through your next VAT return.

As to when you determine the point at which a provision is needed, this is your decision. In the case of liquidation, it is obvious and you should write down the amount to the payout expected. In the case of a normal debt, the amounts involved will determine how much time and money you will spend chasing it, such as whether you chase it yourself (smaller amounts) or engage a debt collector or solicitor.

The expert was Jon Dawson, partner at Kingston Smith LLP.