Bad debt relief procedure on the part of the seller (creditor)

Service-Tax

Each entrepreneur must analyze the receivables and liabilities of his business activity. Unfortunately, many contractors pay late, others shortly after the deadline, and still others do not make the payment or make it many months after issuing the invoice. When issuing a sales invoice, the entrepreneur must show the tax due on a given invoice in the settlement period in which the sale took place, so he must pay this tax or part of it (depending on the amount of input tax deductions) often before receiving payment for a given invoice. Therefore, is there a solution supporting entrepreneurs in terms of the VAT they have previously paid on an unpaid invoice? What is the Bad Debt Relief Procedure?

Bad debt relief procedure

An entrepreneur running a business and being a VAT payer pursuant to art. 89a (1) of the VAT Act, has the right to correct the output tax, shown in the period of domestic sale of goods or services, regarding invoices for the sale of goods or services, the irrecoverability of which has been proven (proven). In addition to the correction of output tax, the taxable amount of output VAT is also reduced. Please note that the correction may relate to the part of the invoice that has been deemed uncollectible.

However, in Art. 89a point 2, the legislator explains that a claim (receivables resulting from unpaid invoices) is considered uncollectible when the claim has not been settled or has been sold in any form within 150 days from the date of its payment date specified in the contract or on the invoice.

Terms of using the discount by the seller

The entrepreneur who made the sale, issued an invoice and did not receive the amount due within 150 days from the expiry of the payment deadline specified in the given invoice, has the right to correct the amount in minus of the due tax resulting from this invoice, as well as the tax base itself, provided that the following conditions are met:

  • the recipient of the goods is a company that is an active VAT payer, not in the process of restructuring, bankruptcy or liquidation,
  • on the day preceding the date of submitting the tax return in which the correction is made and referred to in point 1:

    • the seller and the debtor (recipient) are active VAT payers,
    • the debtor is not in the process of restructuring, bankruptcy or liquidation,
  • 2 years have elapsed from the date of issuing the invoice documenting the sale, counting from the end of the year in which it was issued.

Application of bad debt relief by the creditor

An entrepreneur who has not received payment for the sales invoice (s) within 150 days (counting from the date of payment deadline specified in the invoice) may make an adjustment, i.e. reduce the tax base along with the VAT due resulting from the above unpaid invoices in the VAT return for the period , in which the irrecoverability of these invoices is considered probable, i.e. in the month or quarter in which the above 150 days expire.

It is very important that by the date of submission of the VAT return including the correction of the tax base together with the output VAT, unpaid invoices covered by this correction:

  1. have not been settled,

  2. were not sold in any form.

In addition, an entrepreneur benefiting from a bad debt relief is obliged to notify the relevant head of the tax office of the correction, along with the submitted VAT declaration, along with the amount of the correction and the debtor's details.

Settlement of unpaid invoices before the debtor after 150 days

It may happen that after the seller submits the VAT return containing the VAT correction and the tax base resulting from unpaid invoices, the receivables have been settled or sold.

In such a situation, the seller is obliged to increase the tax base and the amount of tax due in the settlement for the period in which the payment was settled or sold.

If the amount due is only partially settled, then the tax base and the amount of tax payable are increased for this part.

Example 1.

Mr. Wiesław issued 4 sales invoices with the payment deadline on December 15, 2016, where 3 invoices were issued for active VAT payers, and one for a natural person who did not conduct any activity. All invoices have not been paid. The period of 150 days expired on May 16, 2017, and on that day Mr. Wiesław did not receive the payment either. For one amount due resulting from the first invoice, he found someone willing and sold it. In view of the above, Mr. Wiesław:

  1. has the right in the VAT declaration for 05/2017. correct the tax base and output VAT resulting from 2 unpaid sales invoices,

  2. in relation to the invoice, the amount due has been sold, Mr. Wiesław is not entitled to take advantage of the bad debt relief,

  3. in relation to an invoice issued to a private person, there is also no right to benefit from bad debt relief.

Example 2.

Mr. Stanisław issued 2 sales invoices, where:

  1. one invoice was issued on November 14, 2016. for an active VAT payer,

  2. the second invoice was issued on June 15, 2015. for an active VAT payer.

As it turned out, Mr. Stanisław can take advantage of the bad debt relief only with regard to the second invoice by the end of 2017. On the day before submitting the VAT return including the correction of output VAT and the basis, Mr. Stanisław checked the entity to which the first invoice was issued and it turned out that it was a VAT-exempt taxpayer (he registered as a VAT-exempt entity). Taking into account the above conditions, Mr. Stanisław cannot benefit from the correction of output VAT and the basis for such entity resulting from unpaid invoices.