Bad debt relief and reverse charge

When we start cooperation with a contractor, there is a risk that he will not fulfill his obligations and pay the amount due. In such a situation, if the transaction concerns a sale subject to VAT, the entrepreneur may recover the value of the VAT on that sale by using the so-called bad debt relief. However, what if the transaction is for a reverse charge? Will bad debt relief and reverse charge be possible?

Bad debt relief conditions

An active VAT payer, in the event that the contractor does not pay the liabilities within 90 days (counting from the expiry of the payment deadline), has the right to take advantage of the bad debt relief. It allows you to recover the VAT due by making a correction in the VAT declaration for the period in which the 90-day deadline has elapsed.

In order to be able to take advantage of the relief, certain conditions must be met, which are set out in Art. 89a paragraph. 2 of the VAT Act:

• on the day preceding the day of submitting the tax declaration, in which the paid VAT is adjusted, the seller and the buyer are registered as active VAT payers;
• the debtor is not in bankruptcy or in liquidation;
• 2 years have not elapsed since the end of the year in which the sales invoice was issued.

In summary, if the above conditions are met, the taxpayer may correct the VAT return for the period in which the 90 day from the payment deadline has elapsed with the VAT paid on this account.

From 2019, the deadline for using bad debt relief has changed.

Until 2018, the bad debt relief could be used only after 150 days from the date of payment. However, from 2019, this deadline has been shortened and allows you to use this procedure after 90 days from the date of payment.

The 90-day deadline applies to receivables arising after January 1, 2019 and receivables arising before January 1, 2019, the irrecoverability of which will be made probable.

Therefore, the previous limit (150 days) is used for sales invoices with a maturity date up to and including October 2, 2018 (as the 90 day falls on December 31, 2018).

Example 1.

An entrepreneur who is an active VAT taxpayer, on November 2, 2018, issued a sales invoice with a payment term of up to 7 days (November 9, 2018). On February 7, 2019, the contractor still has not paid. Due to the fact that 90 days have passed from the date of exceeding the payment deadline, the entrepreneur has the right to submit a correction of the VAT declaration and take advantage of the bad debt relief.

Bad debt relief and reverse charge

As explained above, the taxpayer, under certain conditions, has the right to claim a refund of the VAT shown. However, will the relief for bad debts and the reverse charge also be possible?

Well, with a reverse charge, there is no possibility of relief for bad debts, neither in domestic or foreign transactions. According to Art. 89a paragraph. 1 of the VAT Act, bad debt relief applies only to transactions carried out in the territory of the country:

the taxpayer may adjust the tax base and 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 also applies to the tax base and the tax amount falling on the part of the amount of the receivable, the irrecoverability of which has been made probable.

In the case of transactions covered by the reverse charge procedure for foreign transactions, confirmation of this position can be found in the individual interpretation issued by the Director of the Tax Chamber in Warsaw on November 14, 2013, file ref. IPPP3 / 443-772 / 13-2 / SM, in which we read:

For the purchase of the described services, the Company receives VAT invoices from its contractors, on which VAT is not shown, but most often (if they are invoices from EU suppliers), the Company's data are indicated on them - including the Polish NIP with the prefix PL and the annotation signaling that VAT is to be settled by the buyer (reverse charge). On this basis, the company independently calculates the VAT due for the import of services and, at the same time, deducts this tax in the same settlement period as input VAT.

There are situations in which the Company does not pay the amounts due for the services provided within 150 days from the expiry of the payment deadline, or until the end of the settlement period, in which it is 150 days from the expiry of the payment deadline.

[...] Referring to the above, it should be noted that from the provisions of Art. 89b of the Act shows that the debtor is obliged to correct the input tax resulting from the invoice documenting the delivery of goods or services within the territory of the country. In this situation, the invoice issued by the foreign entity does not include the amount of VAT (it is settled by the buyer, ie the Company, pursuant to the provisions of Article 17 (1) (4) of the Act). Therefore, the Company is not required to correct the deducted tax on import of services in the event of non-payment of the invoice amount within 150 days of the due date of its payment.

However, when it comes to domestic transactions subject to the reverse charge procedure, confirmation of the above provision can be found in the individual interpretation issued by the Minister of Finance of April 25, 2014, ref. No. PT8 / 033/29/249 / WCH / 14 / RD-87172:

[...] The purchase of services for the transfer of 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 the settlement of input and output tax is carried out according to the buyer's "internal" documents. 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.

To sum up, in this type of transactions, the lack of an invoice from the supplier, which would show the amount of tax "to be deducted" and the occurrence of an internal settlement of the input tax due by the buyer, precludes the application of Art. 89b section 1 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 provision of 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 on the invoice.

Example 2.

The entrepreneur performs subcontracting services related to the construction of houses. In January, he issued an invoice with a reverse charge to his client, which should be paid within 7 days. In May, the invoice has still not been paid, therefore the entrepreneur would like to take advantage of the bad debt relief.

Unfortunately, since a given transaction shows that the VAT was charged to the contractor (recipient), the taxpayer is not entitled to take advantage of the bad debt relief.

Example 3.

In March, the taxpayer performed intra-Community services in Germany. In December, he still has not received payment for the service. Consequently, he made an attempt to apply for bad debt relief.

As the service was not provided on the territory of the country, the taxpayer cannot benefit from bad debt relief.