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HMRC internal manual

Business Income Manual

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Specific deductions: bad and doubtful debts: accountancy practice

The following guidance does not apply to bad money debts of companies which are dealt with under the loan relationship rules. See BIM42701.

Generally accepted accounting practice accepts that events arising after the balance sheet date and before accounts are finalised may need to be reflected in the provision for bad and doubtful debts if they provide additional evidence of conditions that existed at the balance sheet date.

Our interpretation of this is that if:

  • a debt existed at the balance sheet date, and
  • the creditor at that date had no reason to believe that he would not be paid, but
  • before the accounts were finalised he discovered that the financial position of the debtor at the balance sheet date was such that the amount due was, even at that time, unlikely to be paid,

the creditor would be entitled to make a provision for the debt in computing his profit.

A typical example is where a debtor at the balance sheet date goes into administration or liquidation after the balance sheet date and before the date on which the trader approves the financial statements. Whilst the administration or liquidation took place after the balance sheet date, its occurrence before the accounts were finalised normally sheds light on the financial position of the debtor at the balance sheet date. If the period since the balance sheet date is short it is unlikely that a debtor would go from financial good health to insolvency in that period. In these circumstances it would normally be reasonable for the trader to regard the debt as doubtful. The amount of the acceptable provision would depend upon the information available.

On the other hand, we would not accept that an allowable provision arises where:

  • a debt existed at the balance sheet date, and
  • at that date the debtor had the capacity to pay, but
  • before the accounts were finalised, circumstances arose which rendered the debt doubtful.

In this situation, the information gained after the balance sheet date does not reflect on the value of the debt at that date.