Debt Collection

One common reason for being unable to pay a tax bill is that someone else owes you money, and they are taking their time to pay you. This page tells you some of the basics of giving credit and collecting debts. In many industries you will need to give credit in order to be in business at all.

The Invoice

Once you have provided the goods or the service and payment is due, this is notified through a document called an invoice. This gives your business details, details of the goods or services, the total cost and the Value Added Tax if applicable. The invoice is usually sent to the accounts department or the finance office of the customer you are billing by separate post. With any goods you supply, a delivery note may be included just listing the goods, but if you send the invoice itself with the goods, which is often done, then there is a risk of it being lost.

The Statement

Many large customers do a cheque run once a month, and if there are several of your invoices to pay, then they will want to settle with just one big cheque. At the start of each month, you should send your customer a statement which summarises all outstanding invoices and totals them up to make it easier for the customer. Some customers will refuse to pay unless they get a statement.

If your statement arrives on the first of the month, the invoice then becomes due for settlement. If the cheque run is on the 25th of the month, then on average it will take 45 days for your invoice to be settled according to this net monthly account system. On your invoice you may specify your terms of payment as 30 days, but you may well accept 45 days as long as the customer has a regular system.


If you have complied with all the above and your invoice is still overdue after the end of the month when you were expecting settlement, then a telephone call is suggested. If they have lost the invoice, then you may need to send a Copy Invoice which should be marked as such.

With our customers, we are able to e-mail out a notice giving the details to make an electronic payment, which can be useful to do after a telephone call, and we can provide a spreadsheet system to enable our clients to do this. Of course other people will get to know your bank details, which is a security risk. We use online banking for our “collection account”, and we never leave large sums of money sitting in it. Instead we transfer surplus cash to a second account which we keep private.

“We’ve lost the invoice” is one excuse you will hear quite a lot. Think about getting software which can produce a copy invoice which you can e-mail as a PDF attachment. Then follow up with an e-mailed advice on how to make an electronic payment. If this excuse is genuine, then you should get paid pretty quickly.

If they dispute the invoice and you agree to reduce it, then you should send them a Credit Note, which is like a negative invoice. Credit notes are traditionally printed in red.

Sometimes they will send you a debit note, which is their opinion that your invoice should be reduced or cancelled and that you should have sent them a credit note. It is generally only big buyers, with plenty of clout, who send debit notes anticipating that they are dealing with unsophisticated suppliers. Some big buyers also have the problem that their suppliers are not proficient at issuing invoices, and so they will issue a “self-billing invoice” to themselves to remedy this, with a copy sent to the supplier for the VAT records. As an example, a buyer of second-hand tractors from farmers will probably produce quite a few self-billing invoices.

Otherwise you will need to send monthly statements for as long as an invoice stays outstanding. The time and cost of postage, and the time value of money, mean that your invoice is being subtly discounted while it remains unsettled. Generally slow payers are more of a problem than non-payers. Government departments, local government and educational establishments tend to be slow payers, but their credit is good and they do pay at some point.

Statements Up-Front and Offside

Let’s say you issue several invoices in a month, and then a statement at the end of it listing all the statements for settlement the following month. As we said, this is the usual way to do things for customers who are large firms. You can be said to be sending statements up-front.

Another way to do things is to only send a statement when your credit terms have been exceeded, so the invoice can be said to be “offside”. In this case, you might only send a statement at the end of the following month. This system is more appropriate if typically you only send one invoice per month, and your customers are smaller.

Accounting software

If you use general-purpose accounting software, then you should be able to generate both invoices and statements. If you don’t have a letterhead, then a firm of accountants such as David Porthouse & Co will help you to design one using their free spreadsheet to show you your business name in a variety of typefaces and colours. They will then help you to install it in software such as Sage. Your statements should now get noticed. If you have Excel installed on your computer, then you may download the free spreadsheet by clicking here. Your own accountant may also offer this service and show you how to generate statements.

Invoice engines

Instead of general-purpose accounting software, you may find it easier to use software specifically aimed at producing invoices. If you are new to the use of computers, then you may prefer this sort of software which may be called bookkeeping by objectives as opposed to aimless typing of numbers into the computer. The cost of the software is likely to be lower and more in line with what is appropriate at an early stage in the life of a new business.

Once your invoice is produced and sent off, you should follow it up with a monthly statement or statements as required. Here we have to warn you that not every invoicing system is necessarily capable of generating printed monthly statements. Software that is capable may be termed an invoice engine, and the engine in use by David Porthouse & Co for invoicing their own clients is SliQ Invoicing Plus. If you choose this software yourself, then David Porthouse & Co can help you to choose a letterhead using their free spreadsheet, and then to install it. If you have Excel installed on your computer, then you may download the free spreadsheet by clicking here.

If you are a supplier of an invoice engine and you happen to be reading this and you feel you deserve a mention, then please contact David Porthouse & Co. Your software will be assessed for its ability to generate both invoices and statements. David Porthouse & Co is an independent professional Chartered Certified Accountant who will be happy to look at your software. 

Commercial considerations

If a customer takes ages to pay you, then you may think twice about having them as a customer at all. In the words of the song

I asked her for credit; she answered me “Nay”,
“Such a custom as yours I can get any day”.

A risky situation is where you have one large customer who queries all your invoices and takes ages to pay you. You may wish to set limits on the amount and duration of credit given to any one customer. Your software should show you how much each customer owes you, and how long they have owed it, possibly by a display known as an Aged Debtors Analysis. If someone takes a long time to pay you then reduce their credit limit accordingly, and if they place a repeat order then “I am sorry but you have exceeded your credit limit” can be a useful message. Quite possibly the person placing the order was unaware of this, and may not be at all happy with their own Accounts Department. With Government departments and local authorities you can be a bit more lenient with credit limits because their standing is good and they will pay you at some point.

If you run any special offers, for example by direct mail advertising at a quiet time of year, then poor payers may be excluded. The basic principle is that if you do them a favour, they need to do you a favour in return.

Ultimately it comes down to bargaining power. If you supply a large firm with a cynical finance officer, then they may well just stick you into the cheque run for the following month if they think they can get away with it. You could ask for some cash up front, or for stage payments. Ultimately though, if you are one of a large number of similar suppliers, and there is nothing special about your product, then your bargaining power is weak. Try to find another customer who is a better payer. There are actually some nice people out there running businesses, and you just need to find them.

And what about the nasty people? Well maybe they haven’t paid their electricity bill as well, so they have been cut off and they cannot run the cheque-printing machine. Obviously this is exactly what does not happen because electricity companies have some brutal bargaining power. Try to make sure you have some as well. This may not be easy, but you need to think. Simply looking like a sensible business which sends out both invoices and monthly statements, and backs it up with timely telephone calls,  may be a start.

To enhance your bargaining power, try to cultivate a Unique Selling Proposition, and support it with a Distinctive Product, and see if this helps. A USP is something which other people cannot copy, while a DP can be copied, but other people may not care to do so. If you don’t have a USP, or just a weak USP, then aim at a DP. Your customers may not be able to tell the difference, so in their minds you are a big player who needs to be paid on time. Our USP is our use of optical character recognition to produce accounts quicker and cheaper than our competitors, and our DP is the fact that we can help you to select your letterhead and install it in your debt-collection software. Your letterhead will also appear on the front of your accounts and VAT reports.

Should you sue?

At some point you may need to threaten to sue for non-payment of your invoice, and then to actually sue them. Lawyers have a saying “equity aids the vigilant and not the indolent”. You should maintain ordinary commercial vigilance by sending out monthly statements followed up by telephone calls, and having to sue somebody should be a rare event. You definitely cannot sue everybody, but with ordinary vigilance and some patience you may get by. You could sell on the debt to a firm which specialises in this area. You are in your own business and not in the suing business, so it can make sense to do this.

One view is that you should work out how much you spend each year on accountancy and bookkeeping fees. Spend no more than the same amount each year on solicitor’s fees, and within that budget, you can get your solicitor to send reminder letters and possibly pursue a few claims a little further.

A Core Function

Issuing invoices and statements and collecting debts is a key core function of any business, and if you don’t enjoy it then you would do well to think about becoming somebody else’s employee. Some banks will offer to take over your debt collection, which is known as factoring. Always contact your accountant for advice before considering this. If David Porthouse is your accountant, then the answer is likely to be “no” and a reminder of the price and ease of use of software like SliQ Invoicing Plus.

If there are two or more of you working in a business, and you need to telephone late payers, then consider chasing each other’s debts. This gives the impression that you are a substantial firm, and it may be easier to act as advocate of someone else’s cause than to try to plead your own case. Your job title for this purpose is the “credit controller” or “credit control manager”, and you simply want to know when your account will be settled.

If there are two or more of you working in a business, but one of you has little to do, then you should do the debt collection at least to the extent of sending out invoices and statements. As we said, this is a key function of a business, and if ever you face a challenge from the Revenue that you are over-rewarded, then you may have something to say.


Suppose you have a rapidly expanding business, but your customers are taking their time to pay you. To fulfill all your new orders you may need to spend some cash up front, but soon you run out of cash because nobody is paying you. This is called overtrading and a discussion with your accountant is recommended. If we prepare your accounts and we see that your closing profit is tied up in debtors, then we will be sure to point it out, and will add a free Cash Flow Statement to your accounts to keep watch on the situation.

The Cash Accounting Scheme for VAT

Typically your taxes are due on cash receivable, which means debtors as well, but you pay them out of cash received and in the kitty. If you have a lot of slow-paying debtors or potential bad debts, you could have a problem. This issue tends to show up first with Value Added Tax.

It wasn’t much of a problem when VAT was a modest little tax levied at the rate of 8%, but now that the VAT rate has climbed to 20%, some relief is necessary. You may adopt the Cash Accounting Scheme to account for VAT. This allows you to account for output VAT payable only on cash actually received, so you get automatic relief for slow payers and bad debts. Of course, to make it fair you can only account for input VAT on bills or invoices actually settled, but if your business is profitable this won’t be an issue.

A discussion with your accountant is recommended. You may adopt cash accounting at once (or unilaterally) but all previous VAT returns need to have been submitted and paid up. If you are having difficulty paying prior to the adoption of cash accounting, you may be able to come to an arrangement with the VAT Office which then allows you to adopt cash accounting. There may appear to be a little circularity in the argument here, but if you act sooner rather than later, before your VAT surcharges hit 15%, then something useful can be done.

If you use general-purpose accounting software, then look for a switch somewhere in the software to specify that you are now using cash accounting. This remark does not apply to invoice-only software.

In summary, if you struggle to pay your tax bills because other people owe you money, then one remedy is to adopt a regular debt-collection system, and another remedy is cash accounting for VAT. Businesses with a turnover of over £1,350,000 cannot adopt cash accounting for the first time, but they are likely to have dealt with their debt collection problem before they reach that level of turnover.

The Cash-based Turnover Method for the Flat Rate Scheme

If you are using the Flat Rate Scheme for VAT, then the appropriate name for cash accounting is the Cash-based Turnover Method. This may appear to be identical to the Cash Accounting Scheme, but if the rate of VAT changes, you will need to apply the VAT rate in force at the time of issue of the invoice rather than the rate in force at the time of payment, which makes things a bit more complicated.

Sometimes you will receive a round sum as a part-payment for your invoices. Attribute it to your oldest outstanding invoice on a first-in / first-out basis. This attribution matters if you are using CBTM/FRS and the VAT rate changes in the meantime. This is also the reason for the hair-splitting distinction between CAS and CBTM/FRS.

If you use the Flat Rate Scheme together with the Cash-based Turnover Method, then as your invoices are settled you will know straight away what your VAT liability is, and will have the cash to settle it. Click here for more information about the Flat Rate Scheme which you may join as long as turnover ex VAT is less than £150,000 per year.