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Bad debt relief for money lender

I have a client who is a money lender- licensed with the local authorities- some would say a loan shark- but there is a market out there-!

if he lends some one £100 and charges £50 interest- the total to be repaid is £150.00-   if  the customer only pays him £100 back and  after six months does not pay any more- there is effectively a bad debt of £50- which the lender is never going to recieve-

my question is do we show the accounts as income of £50.00 ie the interest charged-  then show £50.00 as s bad debt write off!-  say other overheads come to £10- then we have a loss of £10!

our client had lent out lots of small amounts and there are lots of unpaid debts- that we wish to write off-  is this the correct way to show in the accounts?

if another loan was made of say £200.-  the interest say is £100- total to repay is £300-   if all this was paid then the income would be £100 - 

is there another way to show this.



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I would say that this is one of the few cases where the interest is taxable as a trade receipt, rather than as "interesT2.


As such, the normal rules would apply, as it was a normal trade sale.


therefore, I would agree with your treatment.

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21st Jan 2013 14:54

Thanks, yes this is a self-employed trade-  unfortunately there is a lot of bad debts to write off!

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21st Jan 2013 16:20


Does the purchase of baseball bats feature in the expenses ?

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22nd Jan 2013 08:17

-If he did buy- yes i guess so! lol

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21st Jan 2013 17:14

If the client holds the appropriate licence then the trade is legitimate. Even if the trade is illegal the tax treatment is the same.
The baseball bats are an allowable expense provided they are used wholly and exclusively for business purposes (so no playing baseball, please!).
The bad debts should not be a problem tax wise so long as we are not talking of a general provision.
More difficult is likely to be the calculation of the interest earned in the accounting period on loans which are not due to be repaid completely by the year end.

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22nd Jan 2013 08:27

Thanks very much- Yes the loan interest received is a tougher calculation- 

Im trying to take a simple/ sensible approach-  if  for eg. the loan  was £100 and the fee "interest" is £50  then the loan to be repaid is £150-  if at the year end the customer has paid back £100  and therefore  still owes £50- then i have brought in the accounts pro-rate interest due as  "trading income" as follows oin this eg 

£50 ( interest) /£150 ( total due)  X £100 received - ie £33.33-  and c/f the remaining interest of £ 16.67 , i think this pro-rata approach works-   if the £50 is received in the next accounting period then we will being in the balance of £16.67 as it has been received. if at the end of the next period the £50 was not paid -  then thats when we write off the bad debt! and dont need to bring the interest in as not received!

it seems to be logical way?


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22nd Jan 2013 09:45

Year 2

If in year 2 no more money is received then you have a bad debt.  But the amount of the bad debt rather depends on your accounting entries made in year 1.

Immediately after the loan is first advanced what is the balance on the customer's account?  Is it £100 (the amount advanced) or £150 (the amount due to be repaid over the life of the loan) or some other figure?

If the balance is in excess of £100 what is the corresponding double entry for the excess?

If the excess is £50 is that £50 credited to interest earned (in the P & L A/c) and, if so, what entries do you make to reflect the fact that not all of this £50 has been earned by the end of year 1?

Also you need to consider if pro-rata recognition of the interest over the life of the loan is in accordance with accounting standards (I am not up to date on accounting standards in that connection - so I just don't know).

Obviously is you lend £100 and get £100 back (but the customer does not repay any of the £50 interest on the loan) then, after bad debt relief, you will have made neither profit nor loss on that loan - you will not have a P&L A/c credit for £33.33 and debit for £50!


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22nd Jan 2013 10:23

Not my area of expertise but...

Not my area of expertise but how are you backing up the claim that the £100 received is all capital and not some capital and some interest. A canny HMRC inspector will certainly challenge your assertion that only capital has been received and that all of the taxable interest from trade is the bad debt. Have you sufficient documentary evidence to ensure your claim in valid.

I'd expect that the repayment would be deemed some capital and some interest, and certainly if there were contractual staged repayments the earlier payments would normally be seen as mostly interest and low capital repayments by most amortisation methods. 

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22nd Jan 2013 10:59


From a tax point of view does it matter if the amount not received was part capital and part interest? 

If the customer only every repaid, say £80, then the £20 'capital' loss would be allowable for tax.


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22nd Jan 2013 11:56

Yep - not my field

David - clearly i am out of my depth, just thought there were differences between capital losses and trading.

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22nd Jan 2013 13:24

Allowability of the potential Bad Debt

Just thinking of the allowability of any potential Bad Debts, HMRC have specific considerations as to what constitutes a Bad Debt, to be allowed for tax purposes. The fact that the debt is outstanding after (? only) 6 months does not automatically make it bad or doubtful. Where there is some doubt, this is what HMRC "advise" in their Business Income Manual @ BIM para 42715  :~

Bad & Doubtful Debts: Evidence require

Where there is insufficient information available to determine whether a deduction for a bad debt or a bad debt provision fulfils the above criteria it may be necessary to identify each debt involved and establish:

how the extent of its doubtfulness was evaluated, andwhen this was done, andby whom, andwhat specific information was used in arriving at that valuation.

Typically, this requires sight of all the evidence available, at the relevant date, to the creditor trader regarding the creditworthiness of the debtor. This will include copies of all correspondence, both internal (such as memos and minutes of meetings at which the matter was considered) and external (correspondence with the debtor, solicitors, banks, factoring agencies etc and any reports obtained concerning the financial position of the debtor), relating to the transactions in question covering the period up until the time a reserve for the debt was entered in the creditor's books. 

Following these may, in the circumstances, be quite a task on any large number of outstanding debts.


I hope this helps.

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22nd Jan 2013 12:59

Capital v trading losses

Democratus, if the company's trade is lending money then not getting that money back causes a trading loss.

If the company was, say, a manufacturing company that made a loan to a third party and was not repaid then the loss might well not be allowable for tax (as not a trading loss).


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22nd Jan 2013 14:19

@David thanks

Thanks - that's it! I have always worked in industry hence my crippled thinking.

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