Three important points you need to know about bad debts

Simangele Mzizi, Fsp Business, 17 Sep. 2014

Tags: bad debts, vat, input tax deduction, bad debts and claiming an input tax deduction, sars

If a debtor owes you money and other income has accrued to you (e.g. interest charged on the overdue account), but he doesn’t pay the debt and you have little or no chance of recovering the outstanding balance, it's called a ‘bad debt’.

Because it’s highly likely that you too could fall prey to rogue clients who delay payments or avoid them altogether, you need to be well informed about bad debts so you can take advantage of a bad situation.

Here are three important points you need to know about bad debts

#1: You can claim an input tax deduction from SARS on the amount of bad debt you write off

When you’re dealing with bad debts, chances are once you’ve exhausted all avenues to recover the debt without success, you’ll have to write it off.

The good news is when you write off the debt, you can claim an input tax deduction.

The only condition is that you first have to write off a bad debt before you may claim the input tax deduction.

There are two more important points you need to know about bad debts…

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#2: The way you’re registered for Vat affects how you deal with bad debts

When you register for Vat, you either register on the invoice basis or on the payment basis.

This affects the way you deal with bad debts.

We recommend you checkout the Practical Vat Loose Leaf Service. It’ll explain to you how to claim Vat on debts you write off on the invoice basis and how to claim Vat on debts you write off on the payment basis.

#3: You must pay output tax if you manage to recover bad debt

If, for example, you write off a bad debt and then claim an input tax deduction, but at a later stage you manage to get payment from your debtor, you’ll have to declare and pay output tax to SARS on the amount you recover. Include this in the Vat return for the Vat period in which you recover the amount.

We hope knowing these three things will help you deal with bad debts effectively.

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