Bad Debts Accounting vs Tax Treatment

It's normal for a company, at its year end to review debts and make provisions for any that may be doubtful. Any provision reduces the accounting profits. There is a common misconception, that any provision will also give the company a corporation tax deduction. This is not always the case.

HMRC will expect a company to have taken reasonable measures to collect the debt, before a provision is allowable, for example, court action, or debt collection service, before they will allow a tax deduction.

Also, if a debt is recovered before signing off the accounts, a corporation deduction should not be taken. We would recommend before signing off the accounts, you take a review of provisions and add back any that have been paid.