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How to manually write off customer invoices to bad debt

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Summary

This guide explains how manually write off customer invoices to bad debt in Sage 50 Accounts.

Description

NOTE: This article applies if you use the Standard VAT scheme. If you use VAT Cash Accounting, please refer to this article.

Occasionally you may have customers who are unable to pay their invoices, for example, due to liquidation, insolvency or dispute. You can set these invoices against your current year's profits as a bad debt write off. When this happens you must record a bad debt write off in Sage Accounts.

To process base currency write offs, you can use the Write Off wizard. If you're writing off a foreign transaction, or if you want to process the write off manually, please continue to follow the steps in this article.

TIP: The non-vatable tax code, T9, is used by default when transactions are not to appear on the VAT Return. To check your non-vatable tax code click Settings, Company Preferences then click VAT, and click Parameters.

The following steps contain everything you need to help you manually write off customer invoices to bad debt.

Resolution

Bad Debt Relief conditions

HMRC state that you are only eligible to claim back VAT under certain circumstances, such as:

  • You have already accounted for the VAT on the supplies and paid it to HMRC.
  • You have written off the debt in your day to day VAT accounts and transferred it to a separate bad debt account.
  • The debt has remained unpaid for a period of six months after the time payment is due and payable or, if later, six months after the date of the supply.

NOTE: There are other conditions you must satisfy, for a more detailed description please contact HMRC or visit their website at http://www.hmrc.gov.uk

Create a Bad Debt Write Off nominal code

If you are using the Sage default nominal structure you will already have a nominal code for Bad Debt Write Off, 8100. If you have deleted this account, or created your own nominal structure without a Bad Debt Write Off nominal code, you must create one before proceeding.

  1. Click Nominal codes then click New/edit.
  2. Complete the Nominal Record as required, for example:
    N/C

    Enter the nominal code number you want to use for bad debt write off.

    NOTE: This nominal code should be within the overheads section of the profit and loss. If you are using the Sage default chart of accounts, this is in the range of 8100 - 8199.
    Name Enter the name of the account, for example, Bad Debt Write Off.
  3. Click Save and click Close.

Write off a sales invoice

In the following example you invoiced Brown Ltd for 120.00, including VAT at 20%. The debt has remained unpaid and is to be written off.

  1. Click Customers then click Batch credit.
  2. Enter the relevant details on the Batch Customer Credits window, for example:
    A/C Date Credit No N/C Details Net T/C VAT
    BROWN Write-Off Date BADDBT 8100 Write-Off 120.00 T9 0.00
  3. Click Save then click Close.

TIP: If the invoice has been posted against a project and needs to be adjusted, post a project only charge for the net amount. More information about project only transactions.

You have written off a sales invoice and should now allocate the credit to the invoice to clear the outstanding debt.

Reclaim VAT if a write off qualifies for Bad Debt Relief at a later date

In the following example an invoice for 120.00 , including VAT at 20% , was written off on 30 June, the transaction qualified for Bad Debt Relief as of 31 December.

  1. Click Nominal codes then click Journal entry.
  2. Enter a date and reference for the journal, then enter the required information to reclaim the VAT, for example:
    N/C Name Details T/C Debit Credit
    2201 Purchase Tax Control Account Bad Debt Relief T1 20.00 0.00
    8100 Bad Debt Write Off Bad Debt Relief T9 0.00 20.00
    The date used for this journal should satisfy the HMRC rules of being beyond the six month waiting period as explained in Bad Debt Relief Conditions earlier in this article.
  3. Click Save then click Close.

You have now posted the journal to reclaim the VAT. As required by HMRC this transaction updates box 4 of the VAT Return, VAT reclaimed in this period on purchases.