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Time to write off bad debts

We are in the last quarter of the year for those with a 31 March balance date.

Bad debts have to be written off before balance date.

This means you must have taken all reasonable steps to get paid and conclude your chances of that are slim. You must then do whatever you can to show you have really written off the debt.

Some small businesses have simple systems. For example, they might issue an invoice but not have a debtors ledger. If you are one of these, we suggest you take a copy of the invoice and write on it something like “bad debt written off 13 January 2021”.

We suggest you also put your initials or signature on this copy. You can then produce it to Inland Revenue if they ever ask for it.

There is no obligation to write off your bad debts. This might be the very year you delay doing so. If you anticipate poor income for the 2021 tax year and a higher income for the 2022 tax year, you could consider writing off bad debts in the 2022 year, if this is going to save you more tax in the long run.

Once you have written off a bad debt you are still entitled to try and get the money. If you succeed, the amount you collect becomes taxable income.

If you need any advice or seek any assistance with writing off bad debts, please give us a call