Unpaid invoices versus VAT and income tax


Poles are one of the most undisciplined nations in Europe in terms of timely payment of their obligations. Late payment is a double burden for entrepreneurs because even unpaid invoices result in a tax obligation. Not only do they not receive payment for the goods delivered or the service provided, but they also have to pay income tax and VAT on them. Both VAT and income tax are, as a rule, settled using the accrual method. This means that the obligation to settle accounts with the tax office arises despite the fact that no payment has been received. This is included in the risk associated with the conducted business activity.

Recovery of VAT due on sales - bad debt relief

The legislator, however, does not leave the taxpayer in a hopeless situation. If, despite efforts to collect the receivables, it is not possible to collect the payment from the contractor, the taxpayer may start the VAT recovery procedure after 90 days.

To be able to use the so-called bad debt relief, first of all, 90 days must elapse from the payment date specified in the invoice, and the delivery of goods (provision of services) must be made to an active VAT payer who is not in the course of bankruptcy or liquidation proceedings.

Additionally, on the day preceding the day of submitting the tax declaration in which the correction is made:

  • the creditor and the debtor must be taxpayers registered as active VAT payers,

  • the debtor cannot be in the process of bankruptcy or liquidation,

  • 2 years have not elapsed from the date of issuing the invoice documenting the claim, counting from the end of the year in which it was issued.

Corrections of the tax base and the tax due for the relief for bad debts should be made in the VAT return for the period in which the 90th day from the date of payment of the invoice or contract has elapsed. When the buyer pays for the goods or services, the taxpayer will be required to re-prove the VAT due on the transaction. This should be done in the declaration for the settlement period in which the seller received the outstanding amount.

Unpaid invoices - income tax recovery

Despite the long months of waiting for the possibility of recovering VAT, the entire procedure of its recovery is easier and faster than in the case of income tax recovery. Start a free 30-day trial period with no strings attached!

Pursuant to the Personal Income Tax Act, it is possible to classify a bad debt as tax deductible costs when:

  • the receivables were previously classified as receivable,

  • the irrecoverability of the receivables has been made probable.

In order to prove the irrecoverability of the debt, you must have one of the following documents:

a) an order for irrecoverability recognized by the creditor as factually correct, issued by the competent authority of the enforcement procedure;

b) a court order to:

  • dismissing the petition for bankruptcy involving liquidation of assets, when the assets of the insolvent debtor are not sufficient to cover the costs of the proceedings,

  • discontinuation of bankruptcy proceedings involving liquidation of assets, when the circumstance mentioned in point (a) and),

  • completion of bankruptcy proceedings involving liquidation of assets;

c) a protocol drawn up by the taxpayer stating that the expected litigation and enforcement costs related to the recovery of the debt would be equal to or higher than its amount (only in the case of low-value receivables). Bad debts may constitute tax deductible costs only until they expire.