The subsidiary company (based in UK) invoiced the parent company (based in EU) couple of years ago. Only a small part of the outstanding amount was paid to the subsidiary company. Since the subsidiary is inactive and the parent company does not intend to pay for these invoices. The parent has 100% share in subsidiary and the directors are the same. Can the subsidiary company write it off as bad debt?
22nd Feb 2017
Parent company's bad debt
Parent company's bad debt
Replies (16)
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What was the invoice for eg service charge/rent/wages
sorry..wrong field
Presume this will increase the profits of the parent and possibly increase tax paid by the parent as it will no doubt require to reverse the costs it has already booked? Whilst it will reduce profits of the sub that may be an academic point as sub has ceased trading.
If this is the case ,and the numbers are significant, I suspect I would be thinking this through before acting; there could possibly be other ways to skin this particular cat.
I agree with DJKL, the tax issue is probably more important than the accounting issue.
You say the subsidiary is inactive, does this mean formally dormant or merely not trading. If VAT is an issue wrt bad debt relief it may mean reinstating the subsidiary's trading status write off the debt and to reclaim VAT.
As also pointed out a w/off in subsidiary will require a similar w/back in Hold Co, and taxation issues there to consider.
In short however - yes the subsidiary can w/off the bad debt so long as it qualifies as one
As far as I can tell, only one question has been asked. And the answer is very simple - yes.
The OP asks whether the debt can be written off as a bad debt, but doesn't explain whether it is bad.
So to answer the question, it is necessary to know why the debt has not yet been paid in full, and what the directors' (of both companies) future intentions are with regard to it.
"the parent company does not intend to pay for these invoices".
"Can the subsidiary company write it off as bad debt?"
I'm not sure what is so hard about the question.
A bad debt is one where the debtor is unable to pay, or, exceptionally, cannot be found. If the common directors of the two companies have decided that the balance of the unpaid invoice is not to be paid, perhaps they have decided retrospectively to reduce the charge - we don't know until the OP tells us. That is but one example of the many scenarios where the debt here is not a bad debt but something else.
A bad debt is also one where the debtor simply refuses to pay.
Someone owes me money, they tell me that they have no intention of paying it, so can I write it off as bad? Of course I can.
Should I write it off as a bad debt? That is a different question.
In those very unusual circumstances it's only a bad debt if the cost of enforcing your rights is not commercially justifiable to incur. Otherwise it's an agreed cancellation of the debt, with consequences for the debtor.
That's nonsense, John. Perhaps I've just got better things to do with my time than chase a debt that I expect not to be paid. I can write it off as bad if I want to, without any agreement required on the part of the debtor.
But that's exactly what I said - except the part about the debtor's agreement (that part IS nonsense but it's your word not mine)!
There are consequences for the debtor if you just refrain from chasing the debt because he will still be solvent within an old creditor in his balance sheet that he will need to get rid of.
But the point here is that we are not being told whether the debt is bad or not.
Is there a currency profit or loss to be made by not paying the intercompany debt? If so there could profit/tax manipulation.
The tax authorities of either country could then seek to disbar any bad debt relief
Or am I just being suspicious??
based on the homework i did for do my homework 4 me dot net on bad debt only unpaid rent, salaries and fees aren't included in bad debts but anything like loans to clients and suppliers, credit sales to customers, and business loan guarantees are..so like Bernard said check what was the invoice for
That is also nonsense. A debt is a debt. So, if it goes bad, what is it?
Thank you for all the replies.
The invoices were cross charge between companies in 2013 and in 2014. The subsidiary is not dormant, only not trading. I have recently took over this company and I do not have all relevant information yet regarding the reason why the parent have not paid the subsidiary.