Farley And Partners

Unpaid bills and unbilled work

It is a feature of the tax system that businesses must include in their turnover for the year a value for incomplete work, work you have completed and billed, but not yet been paid for, and work completed but not yet billed, all as at the end of the year.

Service businesses are also required to have accounting records that enable them to bring into account the sales value of incomplete contracts at the end of the year. This is an aspect of your business that requires careful planning so do please discuss this with us.

For unpaid bills, you may be able to claim relief for an identified bad debt, but you cannot claim relief for a general provision based on expectations of how many customers will not pay. Claiming bad debt relief does not stop you trying to obtain payment. Smaller businesses may account for VAT on a cash balance and may soon be able to do so for income tax also. These cash accounting systems provide bad debt relief at source.

Smaller businesses (but not companies) are permitted to account for their business profits on a cash basis, which essentially means that income and expenses are accounted for only as they are paid. The business must have income of less than the VAT threshold at the end of the tax year and not be subject to one of the exclusions. Accounting on a cash basis can make life simpler for a new business starting out, but the profit figures produced can be more subject to significant fluctuations and therefore may prove of limited use in securing, for example, a bank loan or a mortgage.

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