| | How to write off a sales invoice to bad debt |
| Description | When you know that a customer will never pay, write off the invoice. This situation can arise 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 ledger account. This action offsets the bad debt against your profit for the current financial year. |
| Resolution | 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 can't reclaim VAT if you use the VAT Cash Accounting Scheme as you only pay VAT when the customer pays their invoice. Since 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've 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 Before you start You need to ensure that you've got the correct visibility settings for the Bad Debts ledger account in your chart of accounts. To check: - Go to Settings, then Business Settings.
- Select Chart of Accounts.
- Select the Bad Debts ledger account (8100 by default).
- Go to the Visibility section.
Ensure you've ticked the Sales - Invoice / Credit, Product / Services / Customer defaults option. - Select Save.
Write off a sales invoice and reclaim VAT 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 - Ledger Account - choose Bad Debts (8100)
- Net - Enter the gross value of the invoices you want to write off. As there's no VAT on the credit note, this ensures you write the whole amount off
- VAT Rate - Choose No VAT
To clear the outstanding debt, match the credit to any outstanding invoices. For more information, read Allocate existing transactions. To reclaim VAT, you need to record a journal for the VAT amount. This reduces your VAT liability on your next VAT return. - From Adjustments, choose Journals, then New Journal.
- Enter the details such as the reference and the date.
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Add the following lines: | Ledger Account | 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 | - If required, add any additional details to the Description field.
- Select Save.
Write off a sales invoice and don't reclaim VAT Create a credit note if you write off an invoice and can't reclaim the VAT. We recommend that you create the credit note using the following details - Ledger Account - choose Bad Debts (8100)
- Net - Enter the net value of the invoices you want to write off. As there's no VAT on the credit note, this ensures you write the whole amount off
- VAT Rate - Choose the VAT rate used on the original invoice
To clear the outstanding debt, match the credit to any outstanding invoices. For more information, read Allocate existing transactions.
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