A Quick Guide of What to do When a Customer Goes Bust
In these troubled times the failure of one business can have a knock-on effect on its suppliers. If one of your customers goes out of business you will need to quantify the bad debts created by that failure as soon as possible.
Say your accounting year end is 30 June 2009, and one of your customers fails in October 2009 leaving the sales invoices it received in April, May and June all unpaid. Where it is clear that you will not receive payment from the liquidators or administrative receivers of that business for those sales invoices, you can include the bad debt built up between April and June 2009 in your accounts to 30 June 2009. This is applicable as long as your June 2009 accounts have not been finalised by the time you receive confirmation of the bad debt. Any sales made to this customer between July and October 2009 can be written off in your accounts ending 30 June 2010.
VAT on bad debts can only be reclaimed six months after the due date for payment for the invoice. You must also pay the VAT due to the VAT man before it can be reclaimed. If you use the cash accounting scheme (turnover limit = £1.6m at 6/11/09) for VAT you automatically get relief for unpaid sales debts, as you do not account for the VAT due until the sales invoice is paid.
