Relief for bad debts in VAT

The provisions of the Act of 11 March 2004 on tax on goods and services 1 (Next the VAT Act) under certain conditions, they allow the taxable person issuing an invoice to correct the VAT due on claims whose irrecoverability is similar. This correction is commonly referred to as “a relief for bad debts”.

By applying this procedure, the taxable person may receive a refund from the tax on the VAT previously paid from VAT invoices issued, which the counterparties (debtors) have not paid.

Relief for bad debts allows each of the parties to obtain the right by the creditor to ‘recover’ part of the claim in the amount of VAT due, while from second results in an obligation on the debtor to correct the tax included in the invoice documenting the unpaid transaction which he had previously deducted.

1. General

In accordance with applicable provisions the VAT Act, to the end 2018 the debtor had to correct the tax charged if he had not paid the amounts resulting from the invoices within 150 the date of payment – whether the creditor has benefited from a relief for bad debts or not.

The irrecoverability of the claim was considered to be similar in cases where the claim was not settled or disposed of in any form within the 150 the days from the date of expiry of the payment period specified in the contract or invoice.

Within the framework of simplifications for entrepreneurs, applicable from 1 January 2019, VAT relief has also been amended. The most significant change in this respect concerns the shortening of the time-limit to ensure that the claim is not recovered from 150 days to 90 days.

2. Shortening the deadline for creditors to benefit from relief for bad debts

Provision Article 89a(1a) the VAT Act from 1 January 2019 reads as follows: ‘The irrecoverability of a claim shall be considered to be similar if the claim has not been settled or disposed of in any form of a continuance 90 days from the date of expiry of the payment deadline specified in the contract or invoice.’ Thus, the amendment allows for a reduction of the tax base and the associated tax due for the supply of goods or services in the territory of the country in the case of unpaid claims (which have not been disposed of) from which the payment deadline has already expired.

90 days (previously this 150 days). As the legislator pointed out in the justification for this amendment, the purpose of the amendment was to promote the possibility for the creditor, who did not receive his claim from the so-called ‘bad debt relief’, by shortening the time limit for the creditor to make the adjustment.

An equivalent change was also made on the side of the debtor (Article 89b(1-2) the VAT Act). It consists in shortening the deadline for 150 to 90 the date on which he made a compulsory correction of the deduction of the amount of tax resulting from the invoice in the event of non-regulation of the liability resulting from that invoice.

Amendments under Article 89b(1-2) the VAT Act impose an obligation on the debtor to make such an adjustment, leaving the possibility of avoiding that obligation in the case of the settlement of receivables in whole or in part respectively, or when the debtor is in the course of restructuring, bankruptcy or liquidation proceedings.

In the view of the legislator, the changes made to shortening the deadline to benefit from the relief for bad debts on the part of the creditor will undoubtedly have a positive impact on his financial condition, releasing (previously) additional financial resources.

In the case of the debtor, the shortening of the deadline will result in an additional mobilisation in the payment of claims, which will ultimately result in a reduction of the defaults on the economic turnover.

The shorter deadline for the claim to be similar to that of the claim refers primarily to claims arising from 1 January 2019 From the transitional provisions contained in the Act of 9 November 2018 amending certain laws to introduce simplifications for entrepreneurs in tax and economic law 2 relating to changes in the VAT Act in terms of relief for bad debts, this new deadline (90 (d) to be applied also to claims arising before 1 January 2019, whose irretrievability is similar to that of 31 December 2018

Example

The company issued an invoice with a payment deadline for 10 January 2019 Until April 2019 the contractor did not pay for the services provided. The entrepreneur intends to benefit from relief for bad debts. The invoice has passed since the payment deadline 90 days (10 April 2019). The company can therefore use the new sound Article 89a(1a) the VAT Act and adjust the tax base in the declaration submitted for April 2019

3. The concept of relief for bad debts

In accordance with the general rules for clearing the VAT liability due, the seller is required to immediately include in the records (records, records) of the VAT invoice issued, confirming the fact that the taxable activity has been carried out and the VAT resulting therefrom, in principle, the month in which the tax obligation arose.

Therefore, whether the liability resulting from the invoice is paid or not by the recipient of the invoice (the purchaser of the goods or services), the taxable person is obliged to settle and settle the resulting obligation to the State budget (VAT payable).

Where the duties resulting from the invoices issued by the seller are regulated by their consignee (the purchaser of goods and services) in time, the settlement and payment of the tax liability due by the seller and the payment of the fees by the purchaser often take place during the same settlement period, and the VAT due is therefore regulated by the supplier from the funds received from the buyer.

The problem arises when the supplier is not paid. In such a situation, it is not only that it bears specific costs which do not generate revenue, but on its side there is still an obligation to pay appropriate VAT.

4. Advantages for the creditor resulting from relief for bad debts

The application of the procedure of relief for bad debts allows, under certain conditions, to correct the VAT due resulting from invoices not paid by the recipients. Subject to the content of the current provision Article 89a(1) the VAT Act, the taxable person may adjust the tax base and the tax due for the supply of goods or services within the territory of the country in the case of claims whose irrecoverability is similar.

The adjustment also applies to the tax base and to the amount of tax per part of the amount of the claim whose irrecoverability is similar. The correction of the tax due may also relate to the amount of the tax per part of the amount of the debt written off as irrecoverable or whose irrecoverability is similar.

5. Rules on the use of relief for bad debts by the creditor

Correction of the tax base and the tax due (i.e. the benefit of the relief for bad debts) is possible after the conditions laid down under Article 89a(2) the VAT Act On the day preceding the date of submission of the tax return on which the adjustment is made, the following conditions must be met:

1. the supply of goods (or services) is made to the taxable person of the active VAT, not in the course of the restructuring procedure under the Law of 15 May 2015 Restructuring law 3 , bankruptcy or liquidation proceedings,
2. on the day preceding the date of submission of the tax return on which the correction is made:

(a) the creditor and the debtor are taxable persons registered as active VAT payers,

(b) the debtor is not in the process of restructuring, bankruptcy or liquidation;

1. the date of issue of the invoice documenting the claim has not expired two years from the end of the year in which it was exhibited.

The main obstacle to the benefit of the creditor’s debt relief is that the debtor may already be in bankruptcy or in liquidation on the day of correction. Therefore, it is worth to make sure that the above conditions are not met before taking advantage of the relief.

The condition to benefit from the relief of bad debts, which requires that, on the day preceding the submission of the tax return on which the correction is made, the debtor has not been in restructuring, bankruptcy or liquidation proceedings, is the cause of numerous disputes between taxpayers and authorities, and there are doubts in the case-law of the administrative courts.

Consequently, the NSA decided with 6 December 2018 4 referred the following questions to the TEU for a preliminary ruling:

1. whether the provisions Directive 2006/112/ EC[5] – in particular Article 90(2) This directive, taking into account the principles of fiscal neutrality and proportionality, allows for a reduction in the tax base in the event of a partial or complete failure to comply with the payment due to the defined tax status of the debtor and the creditor?
2. In particular, does EU law prevent national law from laying down rules allowing for the benefit of ‘bad debts’ provided that, on the date of performance of the service/supply of goods and on the day before the date of submission of the correction of the tax return in order to benefit from this relief: – the debtor is not in insolvency or liquidation proceedings? – the creditor and the debtor are registered as active VAT payers?

Application for a preliminary ruling from the NSA (Poland) 24 April 2019 – in the case of E. Sp. z o.o. Sp. k. v Minister of Finance 6 waiting for the TEU to decide.

Furthermore, there is currently no requirement for the creditor to notify the debtor of his intention to correct the tax due on claims whose irrecoverability has been similar. Consequently, the creditor does not have to wait to receive a notification from the debtor.

At this point it is worth noting the judgment of the WSA in Białystok with 22 April 2015

Judgment

Provision Article 89a(1) the VAT Act it does not make deductions conditional on the taxpayer's knowledge, but on the facts of the day preceding the date of declaration. This means that if the applicant did not know that the debtor had been declared bankrupt on the date of the declaration, it should make an adjustment in the month in which it was informed.[7].

6. Correction of VAT due

A correction may be made in settlement for a period during which the irrecoverability of the claim is considered to be similar, provided that, until the date on which the creditor submits the tax return for that period, the claim has not been settled or disposed of in any form.

Where, following the submission of the declaration on which the correction was made, the claim has been settled or disposed of in any form, the creditor is required to increase the tax base and the amount of tax due in the settlement for the period during which the charge has been settled or disposed of.

In the case of partial settlement, the tax base and the amount of tax due shall be increased for that part. Together with the tax declaration in which the taxpayer (believer) makes the correction, he should submit a notice of this correction to the U.S.

warden responsible for him, together with the amount of the correction and the debtor's data. The taxpayer should submit a notification on the VAT-ZD form ‘Notice of correction of the tax base and the amount of tax due’.

It should be noted that provisions Article 89a(3) the VAT Act specify only the earliest settlement period in which the relief for bad debts can be settled.

However, it does not set a final time frame for the exercise of that right, which means that even if the creditor did not, for various reasons, provide for a relief in settlement for the earliest period, it can do so in settlement for the next settlement period.

The only time limit for taking advantage of the relief for bad debts is the limitation specified under Article 89a(2)(5) the VAT Act, according to which the relief for bad debts can be used if the invoice documenting the claim has not expired since the date of issue two years from the end of the year in which this invoice was issued.

Example

The company issued an invoice for the services rendered with a payment deadline to 31 October 2018 However, the counterparty did not pay the resulting receivable. Since the date of issue of the invoice documenting the claim had not expired 2 years from the end of the year in which it was exhibited, the company to the end 2020 has time to correct the tax base and the tax due.

Where, following an appropriate adjustment of the duty due, the debtor is deemed to be irrecoverable by the debtor to be regulated or disposed of in any form, the creditor shall be obliged to increase the tax base and the amount of tax due in settlement for the period during which the duty was settled or disposed of. In the case of partial settlement, the tax base and the amount of tax due shall be increased for that part.

7. Effects on the debtor’s default on time 90 days from the date of payment

Non-payment by the counterparty (debtor) of the tax resulting from the invoice also has tax consequences for that debtor.

In case of non-regulation of the duty resulting from the invoice documenting the delivery of goods or services in Poland within the time limit 90 days from the date of expiry of the payment period specified in the contract or on the invoice, the debtor shall be obliged to adjust the deduction of the amount of tax resulting from that invoice, in the settlement of the period during which it expired 90.date from the date of expiry of the payment deadline specified in the contract or invoice (Article 89b(1) the VAT Act).

Adjustments to be made in settlement for the period in which the period expired 90. the day from the date of expiry of the payment deadline. The debtor must correct the tax charged if he does not pay the amounts resulting from the invoices, whether the creditor benefits from the relief for bad debts or not.

Example

The counterparty received an invoice for the amount 6,150 PLN (of which 1,150 PLN VAT) with a maturity of up to 31 January 2020 However, the counterparty did not pay this invoice before expiry 90 days, i.e. on 1 May 2020 Therefore, the tax deducted in the amount 1,150 PLN should show as due in the declaration for May 2020

If the debtor has settled the receivable at the latest on the last day of the settlement period on which it expired 90. the date from the date of expiry of the deadline for payment of that claim, it is not mandatory to adjust the input tax. In the case of partial settlement of receivables at the time 90 the days from the date of expiry of the payment period specified in the contract or invoice, the correction shall relate to the input tax on the unregulated part of the claim.

Example

The debtor did not pay for the invoice issued for the amount 12,300 PLN (of which 2,300 PLN VAT) with a maturity of up to 31 January 2020 Within 90 days after this payment deadline (i.e. on 1 May 2020). However, until the end of May 2020 paid half the dues – 6,150 PLN (of which 1,150 PLN VAT). May, then.

2020 the debtor should make an adjustment to the input tax deducted from the unpaid invoice, but make an adjustment of the amount 1,150 PLN, because before the end of the accounting period in which it expired 90 the day after payment of the invoice, he paid half of the amount resulting from the invoice.

In addition, the debtor does not need to adjust the VAT charged when the last day of the month in which it expires 90. the date from the date of expiry of the payment period is in the course of restructuring, bankruptcy or liquidation proceedings (Article 89b(1b) the VAT Act). Provision Article 89b(1b) the VAT Act valid from 1 July 2015 explained the disputed question as to whether the insolvency administrator is obliged to revise the declaration of deduction of input tax arising before the bankruptcy.

Judgment

Both the system interpretation and the intentional interpretation opposes the imposition on the debtor in bankruptcy of an obligation to make the correction in question under Article 89b the VAT Act, if the insolvency proceedings were already pending on the date of the correction. The taxpayer (debtor) in bankruptcy is not obliged to reduce the input tax accordingly according to Article 89b(1) the VAT Act (ed 1 January 2013) because he remained bankrupt[8].

8. Penalties in relief of bad debts and additional commitment

To 31 December 2016 applicable provision Article 89b(6) the VAT Act, according to which the tax authority or the tax control authority was able to impose sanctions on the debtor (additional tax liability) in the event of breach of his obligation to correct the input tax.

The additional tax liability for failure to comply with the adjustment of the input tax was set at 30% the amount of tax resulting from unregulated invoices which has not been corrected. It is worth noting that in relation to natural persons who are responsible for the act (i.e.

not correcting input tax) fiscal misdemeanour either fiscal criminal offence, no additional obligation has been established.

Example

The counterparty received an invoice for the amount 6,150 PLN (of which 1,150 PLN VAT) with a maturity of up to 30 September 2016 The counterparty did not pay this invoice before expiry 150 days, i.e. on 27 February 2017 Thus, the deducted tax calculated in the amount 1,150 PLN should show as due in the declaration for February 2017 However, the taxpayer did not correct the tax charged in February 2017 Thus, in the case of checks, the tax authority will impose a penalty on the debtor of 30% deducted tax – this penalty will be: 1,150 PLN x 30% = 345 PLN.

From 1 January 2017 VAT changes introduced by the Act with 7 July 2016 amending the Goods and Services Tax Act and certain other laws[9] . As a result of this amendment, the section 6 under Article 89b the VAT Act, which concerned sanctions for breach of obligations related to the relief of bad debts.

This involves an introduction from 1 January 2017 tax penalties for unfair settlement of the tax, resulting in underselling of the tax liability or inflating of the input tax over due, to be reimbursed or settled in subsequent settlement periods (Article 112b and Article 112c the VAT Act).

It is not justified to impose both sanctions on the taxpayer. Penalties under Article 112b and Article 112c the VAT Act shall apply from the settlement period from 1 January 2017

Following the provisions applicable to 31 December 2016 penalties for breach of obligations resulting from Article 89b(1) the VAT Act (relating to the need to correct, in the circumstances set out in that provision, the deduction of the amount of tax resulting from the invoice from which the charge was not settled) shall continue to apply to the settlement periods before 1 January 2017 Therefore, for settlement periods prior to 1 January 2017 recipe Article 89b(6) the VAT Act shall apply as amended.

9. Instructions for the relief of bad debts

In order to benefit from the relief of bad debts, the following must be done:

1. step 1 – review all old unpaid invoices (reliability) from which it has already passed 150 days (after changes – 90 (days) from the date of their payment, and check that the debt invoice has not expired since the date of issue two the years from the end of the year in which they were issued;
2. step 2 – verify that, on the date of delivery of the goods or services, the debtor was a taxable person registered as an active VAT taxable person and was not in the course of restructuring, bankruptcy or liquidation proceedings;
3. step 3 – verify that, on the day preceding the submission of the tax return on which the tax adjustment is made, the debtor is still registered as an active VAT taxable person and is not in the course of restructuring, bankruptcy or liquidation proceedings;
4. step 4 – correct the tax liability due (i.e. correct the tax base and the tax due);
5. step 5 – together with the tax declaration in which the correction was made, notify this adjustment locally appropriate to the creditor of the U.S. Chief on the VAT-ZD form, together with the amount of the correction and the debtor's data;
6. step 6 – if, after the correction has been made, the duty has been regulated or disposed of in any form, the creditor should increase the tax base and the amount of tax due in the settlement for the period during which the duty was paid or disposed of.
7. Clarifications to the VAT-ID template — notification of correction of the tax base and the amount of tax due
8. 1. Model VAT-ZD (1)

The model of the VAT-ZD notification is set out in the Finance Minister's Regulation of 14 December 2012 on the model notice of correction of the tax base and the amount of tax due 10 and to be applied until the amendment enters into force the VAT Act by law amending the Act on Tax on Goods and Services and certain other acts 11 (Come on.the VAT Act 19). That time limit is set for 1 July 2020

10.2. VAT-ID entity

The VAT-ZD form is an annex to the declaration VAT-7, VAT-7K, VAT-7D and is lodged by a creditor who has reduced the tax base and the VAT due on the basis of that declaration Article 89a the VAT Act, so he was relieved of his bad debts.

10.3. Time limit for submission of VAT-ZD

The VAT-ZD form shall be submitted on the date of submission of the VAT return, at which the taxable person makes the correction of the tax due on the basis of Article 89a the VAT Act

10.4. Place of VAT-ZD submission

The place of submission of VAT-ZD shall be the U.S. competent for the taxable person (the creditor) in which he submits VAT returns.

10.5. Data included in the notification

In Part A of the VAT-DD notification, the taxable person (the creditor) shall include the identification details of him himself. On the other hand, in part B of the notification, the taxable person shall include the identification of the debtor and information on the amount of the correction of the tax base and the tax payable (the invoice number and date of issue, the date of expiry of the payment deadline, the amount of the correction of the tax base and the amount of the adjustment of the tax due).

11. Planned changes to relief for bad debts

Under Article 1(13) z.the VAT Act 19 changes were made to the relief for bad debts. New wording introduced Article 89a(5) and deleted section 8 the VAT Act After change Article 89a(5) the VAT Act reads as follows: “The creditor shall notify the head of the tax office competent for the creditor, in the tax return in which the adjustment is made, of the adjustment referred to in paragraph numbered 1." This amendment will apply from 1 July 2020

According to the previous wording Article 89a(5) the VAT Act the creditor is obliged, together with the tax declaration in which he makes the correction, to notify that correction to the head of the tax office responsible for him, together with the amount of correction and the debtor’s data (VAT-ZD notification).

Once the abovementioned amendments enter into force, the notification will no longer be required.

As a result of the change, the information on the creditor’s use of the relief for bad debts against specific invoices will be derived from the structure of the new file itself JPK_VAT, the need to add additional annexes to the declaration was therefore abandoned. This is a simplification for taxpayers in the way VAT is settled.

The change was to come into force since 1 April 2020, However, due to the ongoing epidemic, on the basis of Article 58 Act on 31 March 2020 amending certain laws on the health system related to prevention, prevention and eradication COVID-19 12 , the date of entry of the amendment has been postponed to 1 July 2020

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The article comes from the book C.H. Beck "Bookkeeping and Tax Instructions" under ed. prof. nadzw. dr. hab. Artur Hołda, plus CD, ed. 2, 2020, https://www.ksiegarnia.beck.pl/19340-instrukcje-ksiegowe-i-podatkowe-artur-holda