Reverse Charge and Bad Debt Relief

Service-Tax

Virtually every company is struggling with dishonest contractors. In such situations, the so-called bad debt relief. On the one hand, it provides for the taxpayer's right to correct the output tax in the case of receivables written off as uncollectible, and on the other hand, it imposes an obligation on the buyer to make an appropriate correction of the input tax from unpaid invoices. Taxpayers have doubts as to whether it can be applied to transactions involving the reverse charge.

Reverse charge for unpaid invoices

The seller who delivered the goods or services listed in Annexes 11 and 14 to the VAT Act confirms this fact by issuing a simplified invoice marked with the words "reverse charge", which does not include the rate or amount of VAT (Article 106e paragraph 4 point 1 of the Act about VAT).

If you purchase goods from a domestic supplier on an invoice marked "reverse charge" you must tax the purchase and show the tax, ie both as output tax and as input tax on the return. Of course, we recognize input tax if, in connection with the purchase of these goods, the taxpayer is entitled to deduct input tax.

If the creditor and the debtor are active taxpayers registered as VAT payers, the creditor may adjust the tax due on the supply of goods or services in the territory of the country in the case of claims the irrecoverability of which has been proven. The correction may also apply to the part of the receivable, the irrecoverability of which has been made probable. In turn, art. 89a of the VAT Act allows the creditor to reduce both the tax base and the output tax, if the following conditions are met:

  • the delivery of goods or the provision of services is made to a VAT taxpayer registered as an active VAT payer, not in the process of restructuring, bankruptcy or liquidation;

  • on the day preceding the day of submitting the tax return in which the correction is made:

a) the creditor and the debtor are taxpayers registered as active VAT payers,

(b) the debtor is not in bankruptcy, restructuring or liquidation proceedings

  • 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.

Bad debt relief and reverse charge

Pursuant to statutory provisions, irrecoverability of receivables may be considered probable after 150 days from the expiry of the payment deadline. It is also important that in the current legal state, the use of bad debt relief is a right and not the obligation of the creditor.

As indicated, taxpayers who provide services or deliver goods subject to reverse charges issue invoices without VAT. Therefore, it should be recognized that they do not have the option of taking advantage of bad debt relief. The tax due on the supply of goods or services in the territory of the country does not apply to such taxpayers, and therefore there is no subject of the correction of bad debt relief.

Such a position was confirmed by the Minister of Finance in the individual interpretation of April 29, 2014, file ref. PT8 / 033/29/249 / WCH / 14 / RD-87172, where we can read:

(…) The purchase of services in the field of transferring greenhouse gas emission allowances and goods from Annex 11 to the VAT Act creates a unique mechanism of VAT settlement (revers charge). As a result of its application, the taxpayer-buyer calculates the output tax himself, which is also input tax for him. Thus, with regard to the acquisition of the above-mentioned services and goods from Annex 11, the buyer does not deduct the tax amount resulting from the invoice documenting the purchase. The entire operation of settling input tax with due tax is carried out according to the internal documents of the buyer. At this point, it should be additionally noted that also the seller, when issuing an invoice without the tax amount, will not benefit from the relief specified in art. 89a of the VAT Act. (...)

In view of the above, it should be concluded that in relation to the purchase of services in the field of transfer of greenhouse gas emission allowances into the air and the purchase of goods from Annex 11 to the VAT Act, Art. 89b paragraph. 1 of the VAT Act, according to which the debtor, in the event of failure to settle the amount due resulting from the invoice documenting the delivery of goods or services within the territory of the country, within 150 days from the date of its payment date specified in the contract or on the invoice, is obliged to correct the deducted amount of tax resulting from from this invoice, in the settlement for the period in which the 150th day from the date of expiry of the payment deadline specified in the contract or in the invoice (...).