Service-Tax

Bad debt relief with the creditor and the debtor after the SLIM VAT changes 2

Bad debt relief is a rescue for VAT payers who have not been able to obtain payment from contractors within the deadline specified in the act - 90 days, counting from the date of expiry of the payment deadline indicated in the invoice or contract. Bad debt relief allows the creditor (ie the seller) to recover the amount of tax due on the transaction for which he has not received payment. On the other hand, the buyer is obliged to correct the deducted VAT amount resulting from the unpaid invoice on time. The use of this procedure has consequences for both the creditor and the taxpayer. We explain what the bad debt relief is and how to use it, and what changes SLIM VAT 2 introduces to the relief.

Bad debt relief on sale - when is it eligible?

In accordance with the wording of Art. 89a paragraph. 1 of the VAT Act, it is possible to take advantage of the reduction of the amount of tax due for the supply of goods or services in the territory of the country in the case of claims, the irrecoverability of which has been proven. However, for this to happen, 90 days must pass from the payment date specified in the invoice or contract. The tax correction may occur on the entire amount of the claim, as well as on the part of the amount due that has not been settled and the default has been made probable.

Bad debt relief for sales before October 1, 2021

According to the previous wording of Art. 89a paragraph. 2 of the VAT Act, the conditions for using the relief indicated that bad debt relief was possible when:

the delivery of goods or the provision of services is made to the taxpayer referred to in art. 15 sec. 1, registered as an active VAT taxpayer, not in the process of restructuring, bankruptcy or liquidation;
on the day preceding the day of submitting a tax declaration, which will include an adjustment for bad debt relief, both the creditor and the debtor are registered as active VAT payers, while the debtor is not in the process of restructuring, bankruptcy or liquidation;
no more than 2 tax years have passed from the date of issuing the invoice documenting the claim, counting from the end of the year in which the invoice was issued.

These conditions had to be met in order for the seller to benefit from bad debt relief. However, from October 1, 2021, they have changed due to simplifications introduced as part of the SLIM VAT 2 package.

Bad debt relief for sale after October 1, 2021

Due to the change in the conditions for the relief for bad debts, no transitional provisions were provided for. This means that the new regulations will apply to receivables that arose before October 1, 2021, and the irrecoverability of which has been probable after that date (90 days will pass from the agreed payment date). After the changes, it is possible to take advantage of the bad debt relief in VAT on the part of the creditor (i.e. the seller):

in the case of a supply to an active VAT payer - if on the day preceding the day of submitting the tax return in which the adjustment is made, the creditor is a taxpayer registered as an active VAT payer;
in the case of delivery to an entity not registered as a VAT payer, if:

the claim was confirmed by a final court ruling and referred to enforcement proceedings
or the claim has been entered in a debt register maintained at national level
or consumer bankruptcy has been announced against the debtor pursuant to separate regulations;

in both of the above cases, from the date of issuing the invoice documenting the debt, no more than 3 years may elapse from the end of the year in which the invoice was issued.

For creditors, this means, first of all, that bad debt relief is granted to them when the buyer is an active VAT taxpayer - without verification of the economic situation of the other party to the transaction, of course with the 90 days from the indicated payment deadline. However, there is no obligation to inform the debtor about the fact of taking advantage of this relief.

Easier access to bad debt relief will certainly result in more frequent use of it among creditors (ie sellers). Therefore, if the creditor in his records applies bad debt relief, and the debtor does not, it will be a signal for the tax authority to take an interest in the debtor and initiate tax proceedings.

The task of the creditor who decides to take advantage of the bad debt relief is to inform the competent tax office about this fact. Information on the application of the tax relief is shown in the JPK_V7 file with the field marked "KorektaPodstawyOpodt". Thanks to such an annotation, the tax authority will be able to control more easily whether the debtor has corrected his VAT.

If the taxpayer has taken advantage of the bad debt relief and the debtor has paid the debt to which the relief has been applied, on the date of settlement of the debt, it is necessary to make an entry "restoring" the debt in the sales VAT register and thus in the JPK_V7 file.

Example 1.

Mr. Walery on July 6, 2021, made a sale to XYZ (an active VAT taxpayer) and set the payment date on July 13, 2021. The XYZ company did not settle the payment until October 14, 2021 (on October 11, 90 days passed). In which period should the entry in the sales VAT register be entered into minus in connection with the bad debt relief in VAT? What conditions should Mr. Valery meet?

The entry as part of the bad debt relief should be made in the JPK_V7 file for October 2021 with the marking, among others, "KorektaPodstawyOpodt" field. In order for Mr. Walery to make an entry under the bad debt relief, he should make sure that on the day preceding the date of submitting the JPK_V7 file he still has the status of an active VAT taxpayer and from the date of issuing the invoice documenting the debt, no more than 3 years have passed from the end of the year in which an invoice has been issued.

In the case of a bad debt relief, the entry is made on the basis of an invoice, not an internal document. Therefore, it does not bear the designation "WEW" in the record part of JPK_V7.

Example 2.

Mr. Walery from Example 1 made an entry under bad debt relief in October and thus reduced the tax base. XYZ settled the invoice on November 10, 2021. Is Mr. Walery obliged to "restore" the entry in the VAT register and must tax the sale again?

Yes, Mr. Walery is obligated to pay back the bad debt relief on the date of receipt of payment. In this case, in the JPK file, it also indicates the field "Correction of the Taxation Basis".

From January 2022, in the JPK_V7 file, it will be necessary to indicate the payment date in the cost and income accounting entries, thanks to which the tax authority will be able to realistically estimate when the 90-day deadline has passed and thus verify whether the debtor's bad debt relief is obligatory.

Bad debt relief - what are the debtor's obligations?

The aforementioned lack of the obligation to inform the debtor about taking advantage of bad debt relief is not only an administrative simplification for the creditor. This action is unnecessary due to the fact that the debtor is obliged to correct the input tax on arrears, regardless of whether his contractor has opted for the correction on his part or not.

The principle is set out in Art. 89b of the VAT Act, which indicates that if the arrears (in whole or in part) are not settled within 90 days from the date of expiry of the payment deadline specified in the invoice or in the contract, the debtor is obliged to correct the input tax. This correction should be shown in the JPK_V7 file submitted for the period in which the said deadline expires. The need to correct VAT is intended to motivate debtors to pay their debts on time.

Equally important, the existing regulations indicated that bad debt relief is not granted to the debtor if on the last day of the month on which the 90th day passes from the date of expiry of the payment deadline, the debtor is in the course of restructuring proceedings within the meaning of the Restructuring Law, bankruptcy or in the course of liquidation. On the other hand, from October 1, 2021, this provision was changed and although the debtor is in the process of restructuring proceedings within the meaning of the Restructuring Law, bankruptcy proceedings or in the process of liquidation, he still has to relieve bad debts.

Example 3.

In January 2021, the entrepreneur received an invoice taxed with 23% VAT for the purchase of goods for the amount of PLN 100 net and PLN 23 VAT. The deadline for its payment is January 25, 2021. The invoice was not paid by the buyer, but in January 2021 he deducted VAT from it.

Due to the lack of settlement of the expenditure, the buyer is required to derecognise the VAT amount (PLN 23) from the VAT register of purchases in the period of the 90th day from the payment date indicated on the invoice. It falls on April 25, 2021, so for the April period, the buyer should correct the VAT in JPK_V7M for April 2021 or JPK_V7K April 2021 - quarterly settlement (depending on which periods the taxpayer settles VAT for).

Example 4.

The activity of Mr. Bronisław is under bankruptcy proceedings. On August 16, he purchased a service from the UWU company on a VAT invoice (with a payment deadline of August 19) and deducted the VAT. Unfortunately, for economic reasons, he did not pay the commitment and he will not do it until the end of the year. Does he need Bad Debt Relief?

If Mr.Bronisław does not pay the liability on the last day of the settlement period, on which the 90th day has passed from the date of expiry of the payment deadline, he will have to apply the bad debt relief in the JPK_V7 file for November 2021 on November 17. If the deadline for applying the bad debt relief for receivables did not expire after October 1, 2021, then the previous legal regulations would apply to this case and thus Mr. Bronisław would not have to apply the bad debt relief.

It should be remembered that the so-called bad debt relief does not apply to:

intra-Community acquisition of goods (WNT);
import of services regulated by art. 28b of the VAT Act;
import of services;
simplified import of goods

due to the fact that when settling these transactions, VAT is entered in both the purchase register and the VAT sales register.

What about bad debt relief after paying the debt?

In the bad debt relief procedure, it is also important that the payment is settled after the correcting of the tax due on the side of the creditor, as well as the tax charged on the side of the debtor. If the debtor pays the debt (in whole or in part) or it is sold by the creditor, it will be necessary to increase the tax base and the amount of VAT due again. If partial payment is obtained, such an increase must be applied proportionally.

In this situation, the debtor who has repaid all or part of his debt to the contractor may again deduct the input VAT on a given transaction. If only part of the receivables has been settled, the tax increase should also be made in proportion to the part paid. The tax is deducted again in the period of payment for the debt.

Example 5.

On January 5, 2021, the entrepreneur issued an invoice for PLN 1,845 gross, including PLN 345 VAT, with the payment date by January 12, 2021. By the end of January, he received PLN 500 from the buyer, and the remaining part of the payment was not until June 30, 2021. Was the entrepreneur entitled to a bad debt relief?

The 90th day after the payment deadline expired on April 12, 2021. Therefore, the seller in the JPK_V7M file for April 2021 or JPK_V7K for the second quarter of 2021 (depending on the adopted VAT settlement periods) could show a bad debt relief from the unpaid part of the invoice, i.e. for the VAT amount of PLN 251.50. Due to the fact that the buyer, however, paid the remainder in June, the seller will be obliged to return this rest in the VAT part in the amount of PLN 93.50, as VAT due in the JPK_V7M file for June or JPK_V7K for the third quarter of 2021.

Bad debt relief for unpaid expenses in the wfirma.pl system

In the event of a bad debt relief from unpaid expenses after the statutory deadline of 90 days, wFirma.pl system users have an easier task, as it is generated automatically as an entry in the VAT register.

In the event of failure to settle liabilities towards contractors in whole or in part after the expiry of the statutory deadline of 90 days from the indicated payment date on the cost VAT invoice, the system will automatically generate an entry of the input VAT correction due to unpaid expenditure in the VAT register of purchases.

The user enters the payment settlement to the booked expenses in the system, which shows its actual date, method and amount. In the event of an unpaid amount due from a cost VAT invoice after the above-mentioned date, the system will automatically make entries in the VAT register of purchases on the last day of the month in which the VAT correction was to take place, which will be visible in the RECORDS »VAT REGISTER OF PURCHASES.

If the liability is fully or partially settled, this information should be entered into the system by selecting the invoice on the displayed list and selecting the option SETTLEMENT. Then the settled invoices will also be included in the correction of VAT deductions, increasing the input VAT by the entire value of the tax from the invoice (when it has been paid in full) or proportionally (when the invoice has been partially settled).