We are currently in dispute with HMRC on behalf of a client over the CT deductibility of bad debt relief. The basis of the HMRC argument is that the creditor has not taken all legally available steps to recover the debt.
Over a period of 3 years, our client worked with an offshore company and sent them monthly invoices. None of these invoices were ever paid and bad debt relief was claimed in the company accounts (and CT return). During this period the company did work profitably with other clients but these accounted for a very small percentage of total billings (c15%). Unsurprisingly, if bad debt relief had not been claimed for these invoices (being 85% of turnover), the corporation tax liability would have been substantially higher than the total income actually received.
Lawyers were instructed to send a letter to the customer warning of impending legal action. The response to this was that the customer declared they would move all assets out to another foreign jurisdiction on receipt of any further legal documents. Our client then felt he was unable to proceed with legal action as to do so would remove any possibility of recovery.
We understand the customer has indicated intention to pay the invoices once they successfully raise finance. For this reason, our client has maintained contact with the customer and monitors their finances where he can.
I can see HMRCs point of view. The debt is not yet bad, there is still the possibility of payment and legal action has ceased so no CT relief is available. However, as I alluded to above, without the relief the company would simply go bankrupt as it does not have the funds to meet the liabilities. Does anyone have any experience with this? Surely HMRC can see that if they insist on adding back the bad debt, the company will simply fold and the CT they are looking for will remain unpaid anyway?