Bad Debt

Before writing anything off, there is a sequence worth completing, because it both improves the chance of recovery and supports the eventual write off.

A formal demand letter, sent with proof of delivery, setting out the amount, the invoices, the due dates and a deadline.

An assessment of the debtor: are they still trading, do they have assets, is there anything to recover.

Where the amount justifies it and the state has one, a small claims court filing for a liquidated demand within the limit, which is fast and does not require a lawyer.

Where it does not, a documented decision that recovery is uneconomic.

And throughout, attention to the limitation period, because a debt left unpursued for long enough becomes statute barred and the decision is made for you.

The documentation of that process is what supports the write off. A business that wrote off a receivable with no evidence of any recovery effort is in a weak position when a tax audit asks about it.

The tax treatment is where businesses need to be careful.

Nigerian tax law allows a deduction for bad debts in defined circumstances, and the conditions are specific. A debt must be proved to have become bad, and the deduction is directed at specific identified debts rather than at a general provision made as an accounting estimate. General provisions are typically added back in the tax computation.

The practical consequence is that a business must be able to identify each debt written off, evidence that it was genuinely bad, and show what was done to recover it. That is exactly what a tax audit asks about, because bad debt write offs are an obvious route by which taxable profit is reduced.

The VAT position is separate and worth checking, because output tax may have been remitted on a supply that was never paid for.

The second Nigerian point is prevention. Most bad debts are created at the point of sale rather than at the point of default. A supplier that extended trade credit with no credit application, no reference check, no credit limit, no signed terms and no personal guarantee has taken a risk that was avoidable.

And the third is timing. Nigerian creditors chase informally for years, and the limitation clock runs from the due date. A creditor who never issued proceedings, and never obtained a written acknowledgement or part payment, can find the claim statute barred while they were still being patient.

Three stages a doubtful receivable can reach.

A provision is an accounting estimate. The business recognises that a proportion of its receivables will probably not be collected, without identifying which. It reduces the carrying value in the accounts, and general provisions are typically added back for tax.

A write off removes a specific identified debt. The business has concluded that this particular receivable is bad, and it is removed from the books. Tax deductibility depends on satisfying the conditions and on evidencing that the debt was genuinely bad.

Statute barred is a legal state. The limitation period has run, and the debt can no longer be enforced through the courts, whatever the accounts say. It arrives whether or not the creditor intended it.

A creditor should reach the second by decision, having pursued recovery, rather than reaching the third by inattention.

Writing off a debt does not extinguish it. If the debtor later pays, the recovery is accounted for, and a business that wrote off a debt can still pursue it if circumstances change.

Tax deductibility is conditional, and a business that cannot evidence the debt or the recovery effort may find the deduction disallowed on audit.

General provisions do not attract the same treatment as specific write offs, which is a common source of adjustment in Nigerian tax computations.

And the underlying problem is usually upstream. A business with a growing bad debt figure has a credit control problem rather than a write off problem.