Bad debt relief

For the vast majority of contractors and consultants this should not pose any problems as their end client will usually settle the invoices in a timely manner. The implications of not receiving a timely payment are nonetheless worth exploring.

The invoicing basis means that a business can find that it will need to pay over the VAT raised on an invoice to HMRC before the funds have been received from the customer. This goes to show that profit and cash are not the same thing and that the timely collection of what is owed is an essential part of effective cash flow management for a business.
By invoicing and collecting the funds at a later date your business is offering a credit facility to your clients. If your customers are smaller set ups and on the whole not very well known to you, consider using a credit referencing facility and asking for part payment up front for at least the first invoice. If this represents a large slice of your customer base, consider using the Cash accounting scheme.

So what happens if the worst case scenario presents itself and you never receive the money from your customer? If 6 months have passed and the business is able to demonstrate that it has taken reasonable measures to try and collect the funds the unpaid amount can be written off as a bad debt. This means that the VAT already paid to HMRC in relation to the outstanding invoice can be reclaimed.

Hopefully this is a scenario that will not apply to your business, but as a client of Integro Accounting we will advise and guide you throughout the whole process, including arranging the refund from HMRC.