Tax Implications of Bad Debts for Barristers: An In-Depth Overview

Introduction: Why are Bad Debts a Concern for Barristers?

A bad debt is a fee or service advanced by a lender that the borrower has no intention or ability to pay back. In the legal profession, barristers often find themselves dealing with unpaid fees, leading to bad debts. These debts not only impact cash flow but also have significant tax implications. In this article, we will explore the tax aspects related to bad debts for barristers and how they can claim relief.

The Concept of Bad Debt in a Barrister’s Account

A bad debt arises when a barrister invoices a client, usually a solicitor, and the payment remains uncollected. This unpaid sum becomes a concern for the barrister, particularly when the accounting year ends. Tax relief is available for bad debts as they can be deducted from income.

Recognising Bad Debts: Methods

There are generally two methods for recognising bad debts:

1. Direct Write-Off Method: In this method, the bad debt is recognised and expensed in the tax year it becomes uncollectable.
2. Allowance Method: If bad debts are a recurrent issue, the allowance method is advisable. An estimate of uncollectable amounts is made at year-end, and an adjustment is made to the closing debtors.

Tax Relief: How to Claim

The good news is that barristers can claim tax relief on bad debts. Under the direct write-off method, the relief is claimed when the debt becomes uncollectable. Alternatively, if using the allowance method, the estimated uncollectable amount is deducted from the closing debtors, thus offering an equivalent form of tax relief.

The Role of VAT in Bad Debts

VAT is another concern for barristers dealing with bad debts. If a barrister has charged VAT on the invoice and the payment is not received, they can claim a refund from HMRC for the VAT amount. However, should the debt be recovered subsequently, the VAT should be paid back to HMRC.