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Fortunate are the entrepreneurs who have never encountered late payments from their counterparties. Unfortunately, most of us have dealt with them. A delay of a few days may be forgivable, but situations in which we never see the money are still common. This is particularly problematic because we have to pay VAT on amounts we have never received. To recover that tax, we can use bad debt relief.
A shorter period for recovering VAT
Bad debt relief allows the taxable amount and output tax on domestic supplies of goods or services to be reduced in the case of unpaid receivables that have not been sold and whose payment deadline passed 90 days earlier. Until the end of 2018, the period was longer: as much as 150 days. Since 1 January 2019, a debt is deemed likely to be uncollectible 90 days after the payment deadline. This is governed by Article 89a(1a): “The uncollectibility of a receivable is considered probable if the receivable has not been settled or disposed of in any form within 90 days from the expiry of its payment deadline specified in the contract or invoice.”
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Who can use it?
Bad debt relief is set out in the VAT Act. Article 89a(2) specifies precisely when it may be used. 1. The goods are supplied or services provided to a taxpayer registered as an active VAT taxpayer who is not undergoing restructuring, bankruptcy or liquidation proceedings; 2. On the day before the tax return in which the adjustment is made is filed, both creditor and debtor are registered active VAT taxpayers and the debtor is not undergoing restructuring, bankruptcy or liquidation proceedings; 3. No more than two years have passed since the end of the year in which the invoice documenting the receivable was issued.
How do you make the deduction?
The creditor is not required to notify the debtor that they are exercising the right to bad debt relief. To use the relief, however, the creditor must submit the appropriate form, VAT-ZD, to the tax office. In the monthly VAT-7 return, the output tax is reduced by the relief shown. The adjustment may be made in the return for the period in which the receivable is deemed likely to be uncollectible, that is, the month in which 90 days pass from the payment deadline, provided that the receivable has not been settled or disposed of in any form by the filing date.
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Summary
We must remember, however, that if we recover an overdue amount for which we adjusted VAT, we must make another adjustment and settle with the tax authority. This also applies when the debt is only partly repaid: we must pay the tax again on the amount recovered.
The same rules apply to the debtor, who is required by the act to make an adjustment. The creditor may use this solution under Article 89a, whereas the debtor has an obligation to do so under Article 89b.
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