YOUR STARTER FOR 10
I billed a client £1,000 plus VAT @ 17.5%, i.e. £1,175 last year.
The client has now offered me £900 to settle the debt. I am minded to accept as £900 in my bank account is better than £1,175 in debtors.
For VAT purposes should I:
(a) Grin and bear the £175 output VAT (and write off £275 as a bad debt),
(b) Issue a credit note for £275 inclusive of VAT @ 17.5%,
(c) Issue a credit note for £275 inclusive of VAT @ 15%,
(d) Issue a credit note for £1,175 inclusive of VAT @ 17.5% and an invoice for £900 inclusive of VAT @ 15%, or
(e) Claim to be an Oxford University graduate who does not understand the rules!
David
David Winch
Replies (7)
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Don't agree
with either Pete or Andy.
David is minded to enter into a contract (today) whereby he will accept an immediate £900 in full and final settlement of services provided. This doesn't make the shortfall of £275 a bad debt which in order for VAT relief needs to satisfy certain conditions.
If he goes ahead he must issue the credit note to his customer in order that he can claim VAT relief and the customer (if VAT registered) pay over the similar amount. If the customer had paid £900 on account and then disputed the balance, a different scenario would have ensued.
Agree with Pete T
When did you bill the client?
The answer may be do nothing until the debt is six months old. To add to Pete's advice, clear the client's account with a 'dummy credit note' but coded to bad debts and not sales.
If you issue a credit note to the client you would be giving up your claim to the debt. Why would you want to do that?
None of the above
The correct answer is to write off £275 inclusive of VAT at 17.5% thus claiming bad debt relief at 17.5%.
How you would need to get rid of the debt on your computer system is a different question. If it does not have a bad debt function then I would do a credit note using 17.5% VAT and then a jounal to credit sales £234.04 debit bad debts (P&L) £234.04.
cash accounting
David won't be able to use cash accounting. The turnover limit is £1.3 m ;-)
I like multichoice questions
because it looks as if I have a one in four chance of being right.
I think the answer's (c) David because the credit note is a separate (negative) supply of services today.
However you might like to consider suing the bloke for the full amount on the basis that
(a) he's probably done it before,
(b) he'll do it again to his next accountant/plumber/electrician,
(c) it'll remove his smugness temporarily and
(d) it will keep your books tidy.