Solution Properties
Solution ID:
222001000100644
Last Modified Date:
Tue Dec 19 14:01:16 UTC 2023
Taxonomy Path:
Case category//How do I...//processing
Author:
[email protected]
How to write off a sales invoice to bad debt
Description

You may need to write off outstanding invoices when you know that a customer will never pay the invoice. This could be due to a dispute or when the customer's company goes into liquidation.

To write off your customer’s invoice, create a credit note using the Bad Debts category. This offsets the bad debt against your profit for the current financial year.

Cause

Reclaim VAT on bad debts

If you use the Standard VAT Scheme, you may be able to reclaim the VAT you’ve already paid to HMRC.

You cannot reclaim VAT if you use the VAT Cash Accounting Scheme. This is because you only pay VAT when the customer pays their invoice. As the customer hasn’t paid you, there’s no VAT to reclaim.

Bad debt relief conditions

To reclaim VAT when using the Standard VAT Scheme, you must meet certain conditions, such as

  • The VAT on the outstanding invoice appears on a VAT return and you have paid HMRC
  • You have written off the debt in your accounts and transferred it to a separate bad debt account. You do this when you create the credit note
  • The debt is more than six months old but less than four years and six months old

For more information about these conditions and if you can reclaim bad debt, contact HMRC. For more information, visit their website GOV.UK

Resolution

Write off a sales invoice and reclaim VAT

Write off the invoice

Create a credit note in the following way if you use the standard VAT scheme and want to reclaim VAT.

We recommend that you create the credit note using the following details:

  • Category- choose Bad Debts (8100)
  • Net - Enter the gross value of the invoices you want to write off. As there is no VAT on the credit note, this ensures that the whole value gets wrote off
  • VAT Rate - Choose No VAT

 NOTE: The Bad Debts category may not appear due to it not being visible for sales on your chart of accounts. For more information on how to make it visible read our how to show or hide a category article.

Reclaim the VAT

To reclaim VAT, you need to record a journal for the VAT amount.

This reduces your VAT liability on your next VAT return.

  1. From More, choose Journals, then New Journal.
  2. Enter the details such as reference and the date.

  3. Add the following lines:

    Category Debit Credit Include on VAT Return?
    Bad Debts (8100) 0.00 Reclaim value Leave clear
    VAT on Purchases (2201) Reclaim value 0.00 Select the check box
  4. If required, add any additional details to the Description field.
  5. Click Save.

Write off a sales invoice and don't reclaim VAT

Create a credit note in the following way if you write off an invoice and cannot reclaim the VAT.

We recommend that you create the credit note using the following details

  • Category - choose Bad Debts (8100)
  • Net - Enter the net value of the invoices you want to write off. As there is no VAT on the credit note, this ensures that the whole value gets wrote off
  • VAT Rate - Choose the VAT rate used on the original invoice

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