Back to basics: Tax on bad debts

The inability to recover and pay outstanding debts can often have a serious effect on continued performance of a business. The valuable boost to cashflow that tax reliefs for bad debts can provide is often vital. Conversely, the release of debts can give rise to unwelcome credits chargeable to corporation tax. A company can claim impairment losses in respect of bad debts under the loan relationship rules where generally tax follows accounting treatment. Matters become more complex however where a connection between creditor and debtor companies exists. The set-off of impairment losses also depends on whether the debt arose from a trading or non-trading relationship. Businesses can also recover VAT on bad debts subject to relevant conditions.