How to recover VAT from unpaid invoices

What about the VAT paid by us, if our contractor does not pay its liability? Pursuant to the provisions of Polish law, a taxpayer who finds himself in such a situation has the right to recover VAT from an unpaid invoice using the so-called bad debt relief. Check how to recover VAT from unpaid invoices!

How to recover VAT from unpaid invoices - bad debt relief

Bad debt relief is a way to recover VAT from an unpaid invoice. It makes it possible to correct the tax base and the tax due in the case of receivables that are unlikely to be collected. Irrecoverability is considered probable if it is not paid or disposed of in any way within 150 days from the date on which the payment deadline has expired (according to the payment deadline stated on the source document - usually an invoice). Only if this condition is met, it is possible to recover VAT from an unpaid invoice. But that's not all!

Bad debt relief - conditions

In order to be eligible for the bad debt relief, the following conditions must additionally be met:

• both the supplier and the buyer must have the status of an active VAT payer,

• the debtor may not be in liquidation or bankruptcy (at the time of delivery of the goods or performance of the service),

• irrecoverability of receivables must be substantiated,

• no more than 2 years may elapse from the date of issuing the invoice documenting the claim (counting from the end of the year in which it was issued),

• moreover, between the creditor and the debtor there cannot be:

• affinity,

• marriage,

• kinship

• affiliation due to adoption,

• capital ties resulting from the employment relationship and property.

Until 2013, the creditor had to send a letter to the contractor informing him of his intention to take advantage of the bad debt relief. Only when, within 14 days of receiving such notification, the debtor did not pay the entire amount, the creditor could make an adjustment. However, the regulations have changed, now it is enough that the above-mentioned conditions are met to be able to recover VAT from an unpaid invoice. Therefore, there is no obligation to inform the debtor about using the bad debt relief.

When to make a correction?

Pursuant to Art. 89a paragraph. 3 of the VAT Act, the creditor has the right to correct the tax due in the settlement for the period in which the default becomes probable (150 days from the payment date indicated on the invoice). This claim may not be repaid or sold until the date of the declaration. If the amount due is settled by that time, the taxpayer cannot make any adjustments.

Example 1.

In December 2013. Mr. Jan delivered the goods to ABC for the amount of PLN 15,000 net + PLN 3,450 VAT. Both Mr. Jan and his contractor have the status of an active VAT taxpayer, and there is no special bond between them. The payment deadline according to the invoice issued by Jan was 30 December 2013. However, the amount due was not settled. Due to the fact that on May 29, 2014, the 150th day passed from the date of expiry of the payment deadline specified in the invoice, Mr. Jan is entitled to apply the bad debt relief in the settlement for May.

If the receivable is settled or disposed of after the declaration has been submitted with the correction, the creditor is 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 disposed of. If the amount due is only partially settled - the tax base and the amount of tax due are increased in relation to the settled part.

Example 2.

In August 2014. ABC company regulates the liability towards Mr. Jan. Therefore, Mr. Jan is obliged to increase the tax base and the tax due in the declaration for August 2014 (month of debt recovery).

Additional obligations of the creditor

Along with the declaration in which the output tax was corrected, the head of the tax office should receive information about the amount of the correction and the debtor's data. The creditor is required to inform the head of the tax office about the relief in order to enable the tax authorities, inter alia, to verification of the fulfillment of the debtor's absolute obligation to correct the input tax. This notification is submitted on the VAT-ZD form.