UK tax return - can I do anything about unpaid invoices?
Thread poster: Wendy Cummings

Wendy Cummings  Identity Verified
United Kingdom
Local time: 01:55
Member (2006)
Spanish to English
+ ...
Jan 15, 2007

This is the first year that I have been officially self-employed, and so will need to file a tax return.

Unfortunately I have one invoice from a client who appears to have gone bankrupt, and initial investigations would indicate there is no chance of recovery. I am sure most already realise this, but by way of reminder from someone who was too trusting to think of it at the time: if you're contacted by a new agency - CHECK OUT THEIR BLUEBOARD LISTING BEFORE ACCEPTING ANYTHING!! (...she writes, kicking herself under the table...)

This is therefore not just "money I haven't earnt", but "money I have lost" - if you see the distinction.

Is there any way of including this on a tax-return. Do I put it as a taxable expense, so that my profit is reduced by the outstanding amount. Or is there some other provision?

Many thanks


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Tim Drayton  Identity Verified
Cyprus
Local time: 03:55
Turkish to English
+ ...
Phone your local tax office Jan 15, 2007

I was freelancing in the UK a few years ago and I always found my local tax office was happy to give advice over the phone about queries in connection with tax returns.

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Ingo Dierkschnieder  Identity Verified
United Kingdom
Local time: 01:55
Member (2004)
English to German
+ ...
Bad debts Jan 15, 2007

Include the amount in your income (box 3.29 on the self-employment form) and deduct under bad debts (box 3.59). However, you should only deduct it if is quite obvious that you will not get the money (which it seems to be). It is no big problem, however, to include the amount again in the next tax return, should the money arrive against all odds.

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Wendy Cummings  Identity Verified
United Kingdom
Local time: 01:55
Member (2006)
Spanish to English
+ ...
TOPIC STARTER
I see Jan 15, 2007

Thank you, Ingo and Tim.

I don't have to do the form until next time round, as I only started during this current tax year, but I will keep your advice in my file - there is an "outside" chance I might get paid between now and then...


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Charlie Bavington  Identity Verified
Local time: 01:55
French to English
Further Detail Jan 15, 2007

It depends on the approach you have adopted to the income/revenue side. Briefly, you have a choice:

a) you can declare as revenue anything that you have billed for within the tax year
b) you can decide to only count money you actually receive in the tax year (irrespective of when you actually billed for it).

Bad debts (as described on the form by Ingo) only apply if you have declared that invoice as revenue. Either in a previous tax year, or this tax year.
In other words, it only applies if you are operating under option a) above, i.e. you adopt the approach that you count as revenue everything that you bill for, whether or not you actually get the money.

Personally, I operate under option b), which simplifies life no end And makes absolutely no difference whatsoever to your tax position in the long run.


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Paul Hinchliff  Identity Verified
Local time: 01:55
Russian to English
+ ...
agree Jan 15, 2007

I would definitely recommend with Charlie that you only treat hard cash in the bank account as income for tax purposes. I keep a note on a simple Excel file of paid and outstanding accounts - with a note of days elapsed between invoice and payment for future reference too.

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Wendy Cummings  Identity Verified
United Kingdom
Local time: 01:55
Member (2006)
Spanish to English
+ ...
TOPIC STARTER
more... Jan 15, 2007

Charlie Bavington wrote:

Bad debts (as described on the form by Ingo) only apply if you have declared that invoice as revenue. Either in a previous tax year, or this tax year.


As Paul says too, I agree it makes sense to only declare actual revenue received (I too have an Excel spreadsheet to keep track!).

But this relates to my original point - a bad debt is money not received, and so it doesn't count as "income" in the strict sense.

However, it is work that I spent time doing, and could have spent doing something else, and so although its not money that I have received, it is money that I have lost.

Ingo's option would appear to cover this situation, but as Charlie also says, because you are effectively adding then subtracting the same amount, in the long-run it makes no difference to the final balance.

I was curious to know whether it is possible to NOT mark it as income, but TO mark it as a loss?

For example, could it be included as an expense - thus reducing the overall taxable profit?


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Charlie Bavington  Identity Verified
Local time: 01:55
French to English
Logic, loopholes, etc Jan 15, 2007

Wendy Leech wrote:

For example, could it be included as an expense - thus reducing the overall taxable profit?


I can see your point here, it would on the face of it appear "fair" to be kind of "compensated" (in a general sense) for the potential loss of earnings/time you could have spent doing something else.

However, this approach could all too easily be exploited, it would become a loophole. Imagine you billed for 30k over the year, and 10k wasn't ever paid. As it stands, whichever approach you adopt, your income for tax purposes is 20k (30k minus 10k of bad debt). If your idea was adopted, income for tax purposes would fall to 10k (20k income - minus 10k of bad debt). I can't see HMRC buying that

Edit: the fundamental problem being that the same loss is recorded twice, which runs counter to all accounting principles. This could easily become a 'loophole' in the sense that the wily could probably arrange things in order to record such losses between subsidiaries or parent companies (or close friends!) in order to minimise the overall tax burden.

[Edited at 2007-01-15 13:24]


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Wendy Cummings  Identity Verified
United Kingdom
Local time: 01:55
Member (2006)
Spanish to English
+ ...
TOPIC STARTER
worth a try??!! Jan 15, 2007

Charlie Bavington wrote:

I can't see HMRC buying that


I doubt it too, but might be worth a try!

But that does of course beg the question that what would any company who found themselves in such a dire situation of loss do? And although it might not necessarily be worth it for smaller amounts, surely the same approach (if indeed there was any) could then be used in less serious situations?

It may be a case, as Tim suggested, of just calling the tax office and seeing what they say.


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RobinB  Identity Verified
Germany
Local time: 02:55
German to English
Cash v. accrual accounting Jan 15, 2007

Wendy,

Charlie's a) and b) options refer to cash and accrual accounting respectively.

If you apply accrual accounting (the 'b' option), you can indeed charge an allowance account for bad debts and other unrecoverable receivables.

But if you apply cash-basis accounting, i.e. you only declare as revenue the cash amounts received, and only declare as expenses the cash you have paid, you can't claim deductions for bad debts. Sorry, but that's the way the system works. If you apply cash-basis accounting, a bad debt is not "money not received", it's simply a transaction that never occurred in the first place. Yes, of course you've spent time doing the translation, so there's an opportunity cost involved, but unfortunately you can't charge this as an expense unless you're a company paying yourself a salary. If you're simply self-employed, there's no accounting or tax expense involved.

Unfair, I know, but that's the way cash-basis accounting works. You could always move to accrual accounting, but that's far more complicated, and you'd really need to have an accountant run your books for you.

Robin


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lexical  Identity Verified
Spain
Local time: 02:55
Portuguese to English
What luck! Jan 15, 2007

All I can say is that you are lucky to be able to opt between accounting for income on the basis of invoiced turnover or money actually received. We don't have that option here in Spain - your declared income is what you invoice, though you can claim 5% (I believe) a year as bad debts.

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Peter Linton  Identity Verified
Local time: 01:55
Member (2002)
Swedish to English
+ ...
Talk on tax in February Jan 15, 2007

Just to point out that there is a talk on UK income tax etc in London on Sat 3 Feb, as part of the ITI (Institute of Translation and Interpreting) Professional Development Course Module 3.

An expert from the Inland Revenue will be talking about Self-employment: National Insurance and tax, records you must keep, claimable expenses, self-assessment, VAT, specifically for freelance translators. (There is a charge for the course).

I have been to this talk before, and it is very good and authoritative. He also explains that you don't really need an accountant -- these days you can do it yourself.


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Wendy Cummings  Identity Verified
United Kingdom
Local time: 01:55
Member (2006)
Spanish to English
+ ...
TOPIC STARTER
oh well! Jan 15, 2007

RobinB wrote:

Yes, of course you've spent time doing the translation, so there's an opportunity cost involved, but unfortunately you can't charge this as an expense unless you're a company paying yourself a salary.


Thanks Robin. Although its not as positive a situation as I was hoping for, at least I know how it works now.

Fortunately its not a huge outstanding amount, so I have not lost out too much.

And thanks Peter for letting me know about that course. I had somehow not seen any info on that one from ITI. I can't seem to download the .pdf brochure from their site, but I'll contact them direct to find out more details.


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