Taking advantage of bad debt relief when selling receivables

Service-Tax

Regulations concerning the use of the so-called bad debt relief by the seller was included in Art. 89a of the Value Added Tax Act. Its current wording is slightly different from the one that was in force until the end of 2012. Taking advantage of the bad debt relief in 2012 and the subsequent sale of the receivables to which the relief was granted gives rise to the relevant legal consequences, as described below.

Is a "reverse" VAT correction necessary?

The vast majority of judgments and tax interpretations refer to the need to make a "return" correction of output VAT in the event that the entrepreneur takes advantage of the bad debt relief.

Such a conviction was presented by the Provincial Administrative Court in Kraków in the judgment of 15 February 2012, ref. No. act I SA / Kr 2114/11:

“(...) Therefore, if the taxpayer-seller receives a debt that was previously written off as uncollectible and for which a tax adjustment was made under the bad debt relief (which was the case here), then he is obliged to increase the output tax accordingly. This obligation results from the provision of Art. 89a paragraph. 4 AE This applies to a receivable constituting the turnover from which the output tax arose, in relation to which a bad debt relief was previously adjusted. The provision provides for the settlement of receivables in any form. It does not matter who will pay the amount due, so the obligation to increase the output tax will also arise in the event of payment by a third party. (...) ”.

However, among them you can also find ones that indicate that it is not necessary to make a correction. This position was adopted by the Provincial Administrative Court in Warsaw in the judgment of June 29, 2012, ref. No. act III SA / Wa 2690/11:

“(...) Therefore, the sale of receivables to a third party against whom the taxpayer took advantage of the so-called tax relief. bad debts, provided for in Art. 89a paragraph. 1 u.p.t.u. does not generate on the part of the seller (taxpayer - seller - creditor) the obligation to make an incremental adjustment referred to in art. 89a paragraph. 4 of the Act on Public Procurement Law (...) ”.

It is worth emphasizing that both of the above-mentioned judgments are not final and were issued in individual cases, which means that they cannot constitute a general interpretation of the law.

Determining the value of the "reverse" output VAT adjustment

In the case of determining the value of the "return" adjustment of output VAT as part of the taxpayer's taking advantage of the bad debt relief, there are also two standpoints.

The first of them, most often asked by tax authorities, says that only the part that was obtained in connection with the sale of receivables is subject to adjustment. Such a view was presented by the Director of the Tax Chamber in Poznań in the interpretation with reference number ILPP2 / 443-962 / 12-2 / EN of December 12, 2012:

"(...) To sum up, a company that sells receivables to a third party and receives from it its value or a part of this value, and the receivable has previously been subject to an adjustment of the output tax (as a receivable whose uncollectibility has been proven), will be required to increase the tax due in the part obtained from the sale of receivables (...) ”.

A similar opinion was given by the Director of the Tax Chamber in Katowice in the individual ruling of March 15, 2013, number IBPP2 / 443-1257 / 12 / WN:

"(...) since the Applicant has sold to a third party a claim (for a price lower than the nominal value), in relation to which he previously used the legal regulation provided for in Art. 89a paragraph. 1 of the VAT Act, therefore, in accordance with the aforementioned provision of para. 4 of the same article, is obliged to make, in the VAT settlement for the period in which the above-mentioned sale, correction (increase) of the amount of tax due by the value of the tax due relating to the part of the receivable sold, ie in this case to the part obtained from the sale of the debt in the amount of PLN 70,000 (...) ".

The second position is an isolated position, which was in fact adopted in the interpretation of the Director of the Tax Chamber in Warsaw of July 3, 2013, ref. No. IPPP3 / 443-474 / 13-2 / MKw:

"(...) In turn, referring to the issue of the obligation to correct the output tax after the sale of receivables previously subject to the adjustment with regard to the amount obtained from the sale of receivables, it should be stated that if the taxpayer (creditor) took advantage of the bad debt relief in accordance with Art. 89a of the Act, and then will sell the receivables (receivables), in accordance with Art. 89a paragraph. 4 of the Act will be obliged to increase the tax base and the amount of tax due in the settlement for the period in which the receivable was settled or sold. (...)

In this situation, an obligation arises to submit an appropriate correction after the sale of receivables (receivables), consisting in increasing the amount of tax due in the amount of the previously made VAT correction. As already indicated, it does not matter at what price this claim was sold. The taxpayer selling the debt ceases to be the creditor, as the rights of the current creditor in the scope of the debt sold are transferred to the buyer of the debt. (...) "

The positions of the tax authorities are not clear, therefore it is difficult to clearly state which of them will prevail in future interpretations.