Finance Leasing Manual - FLM43.23
Bad debts: arrears of rent
A further complication arises if the rent in the first year was
expected to be paid when the Year 1 accounts were drawn up, but the
lessee defaults in Year 2 without any payment being received. The
position
here might be.
The increase of £20,000 in the bad debt here (compared
to FLM43.18) represents the £20,000 that was due to be
received in year 1 and which was taxed. The debt having become bad
in year 2, relief is now given for the £20,000 that was taxed
in year 1.
It should be noted however that the only Schedule D Case I
deduction is for amounts which have been taxed as revenue trading
receipts. In other words the debt here has two, or three,
constituent parts:
- one is the £20,000 arrears of rent which is revenue in nature (for which relief is given, matching the taxation of that sum in the preceding year);
- another part represents the loss on the current value of the loan (£14,850) - although a loan in bookkeeping terms, for tax purposes this figure represents the capital asset and is a capital loss;
- finally, in the alternative presentation, there is the part (£5,150) of the loss which represents something (the finance charges relating to Years 2 and 3) never recognised as a taxable receipt and so is not an allowable Schedule D Case I deduction.
