BIM42701 - Specific deductions: bad & doubtful debts: overview

ICTA88/S74 (1)(j) provides that no deduction may be allowed for any debts except:

• a bad debt (proved to be such),
• a debt or part of a debt released by the creditor wholly and exclusively for the purposes of his trade, profession or vocation as part of a relevant arrangement or compromise,
• a doubtful debt to the extent estimated to be bad, meaning, in the case of the bankruptcy or insolvency of the debtor, the debt except to the extent that any amount may reasonably be expected to be received on the debt.

FA96/SCH20/PARA4 removed the words ’proved to be such' from Section 74 (1). The start time is 1996-97 for income tax, and accounting periods ending after 30 June 1999 for CT. Even before the commencement of SA, the notion that the trader ’gave proof' to HMRC that a debt has become bad had little or no practical effect, and the amendment is not significant in practice.

’Relevant arrangement or compromise' means:

• a voluntary arrangement under the Insolvency Act 1986 or the Insolvency (Northern Ireland) Order 1989, or
• a compromise or arrangement under Section 425 Companies Act 1985 or Companies (Northern Ireland) Order 1986 Article 418.

A deduction for a bad or doubtful debt is to be made in arriving at the profits of the year in which the debt becomes bad or doubtful.

Subject to the points made in the rest of this section a useful starting point in quantifying the amount of any deduction available in respect of doubtful debts will be the amount reserved in the taxpayer's books, provided this is based on a separate valuation of each debt.

As regards debts claimed to be bad or doubtful on account of currency restrictions see, however, BIM42750.

A general reserve, for example, one calculated as a percentage of total debts or of total sales, should not be admitted as a deduction if made without regard to the circumstances of the particular debtors.

Where appropriate, enquiry should be made of the office dealing with the debtors' tax liabilities as to the extent to which their circumstances justify the deductions claimed.