Bad debts relief: paying only VAT equals non-payment


In many cases, taxpayers are not paid for services or goods provided. The taxpayer then bears the financial costs of the unreliable contractor and the tax costs related to such a transaction. The legislator, seeing the above problems, introduced the so-called bad debt relief, which relieves taxpayers from the need to pay taxes on transactions unpaid by contractors.

Bad debt relief and the right to deduct VAT

The basic principles of deducting input tax have been formulated in Art. 86 sec. 1 of the Act of March 11, 2004 on tax on goods and services - hereinafter: the VAT Act.Pursuant to this provision, to the extent that the goods and services are used to perform taxable activities, the taxpayer referred to in art. 15, has the right to reduce the amount of tax payable by the amount of the input tax, subject to article 22. 114, art. 119 paragraph. 4, art. 120 paragraph 17 and 19 and article. 124.

The amount of the input tax is the sum of the tax amounts resulting from the invoices received by the taxpayer for the purchase of goods and services.

The right to reduce the amount of tax due by the amount of input tax is granted when certain conditions are met, i.e. the deduction is made by the taxpayer of value added tax and when the goods and services on which the tax was charged are used for taxable activities, i.e. . those which result in the determination of the tax due.

Thus, the taxpayer has the right to deduct tax on goods and services regardless of the payment made. The payment is therefore irrelevant to the right to deduct input tax.

Bad debt relief and VAT tax obligation

According to the general rule expressed in Art. 19a paragraph. 1 of the VAT Act, the tax obligation arises when the goods are delivered or the service is provided, subject to paragraph 5 and 7–11, art. 14 sec. 6, art. 20 and art. 21 sec. 1.

In the event that before the delivery of the goods or the performance of the service, all or part of the payment was received, in particular: prepayment, advance payment, advance payment, installment, construction or housing contribution before the establishment of a cooperative right to a dwelling or premises for another purpose, the tax obligation arises at the time of its receipt in relation to the received amount, subject to the provisions set out in the Act (see Article 19a (8) of the VAT Act).

Pursuant to the above-mentioned provisions of tax law, if the taxpayer receives all or part of the payment before the delivery of the goods (before issuing the order to ship the goods to the customer), the tax obligation arises upon its receipt in relation to the amount received.

At the time of recognizing the tax obligation, the taxpayer should account for the output tax. The above regulations, in most cases, do not provide for an obligation to pay for the service provided or goods delivered.

As a rule, the payment is therefore important for the settlement of the tax due in the case of advances and advances.

Bad debt relief

The rules of tax settlement in relation to bad debts are set out in the provisions of Art. 89a and art. 89b of the VAT Act.

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.

On the other hand, the irrecoverability of receivables is considered probable if the receivable has not been settled or disposed of in any form within 90 days from the date of its payment deadline specified in the contract or on the invoice (see Art.89a (1) and (1a) of the VAT Act) .

The above regulations apply when the following conditions are met:

  • 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 within the meaning of the Act of May 15, 2015 - Restructuring Law, bankruptcy proceedings or in the process of liquidation;

  • on the day preceding the date of submission of the tax declaration, in which the correction referred to in paragraph 1 is made 1:

    • the creditor and the debtor are taxpayers registered as active VAT payers,

    • the debtor is not in the process of restructuring proceedings within the meaning of the Act - Restructuring Law, bankruptcy proceedings or in the process of liquidation;

  • 2 years have not elapsed from the date of issuing the invoice documenting the debt, counting from the end of the year in which it was issued;

The adjustment referred to above may take place in the settlement for the period in which the irrecoverability of the debt is considered probable, provided that by the date the creditor submits the tax declaration for this period, the debt has not been settled or disposed of in any form.

The above regulations are intended to regulate situations that often occur in trade, namely when the contractor, despite the prior obligation, fails to pay for the delivered goods or the service rendered. This is an extremely unfavorable situation for the seller, because he not only loses money, but is also required to pay the tax due on goods and services that arose on the transaction.

The fact that the taxpayer-seller takes advantage of the above-mentioned relief and corrects the output tax is associated with the obligation to correct the tax charged by the taxpayer-buyer. Thus, the tax correction causes the constructionally that the output tax ceases to exist, which means that the input tax that could be deducted also ceases to exist. The buyer is obliged to correct the input tax. Thus, the element implements the basic feature of value added tax, which is its neutrality. Taking into account the above legal regulations, it should be stated that the basic condition for taking advantage of the bad debt relief is simply the existence of a debt (no payment for the invoice). Start a free 30-day trial period with no strings attached!

Bad debt relief and payment of VAT only

In many cases, taxpayers only regulate VAT. Thus, in such a situation, the taxpayer does not pay for the entire invoice.

Example 1.

The taxpayer purchased production materials. Due to the collapse of the market, he did not have the financial means to pay the seller for the goods. The taxpayer decided to pay only the VAT resulting from the invoice. In such a case, will it avoid the need to correct the input tax due to non-payment of the invoice (the so-called bad debt relief)?

In this case, the taxpayer did not pay for the materials. The invoice amount was therefore not paid. The definition of the regulation can be found in the PWN Dictionary of the Polish Language. To regulate it: pay, pay the bill, payment, debt, but also arrange it, settle it. It follows that "regulation" and "payment" are synonymous terms, although the dictionary definition indicates that the term "regulate" has a broader scope than "pay". This is because it includes not only the payment of receivables, but also the ordering of relations, which does not necessarily have to be made by way of payment.

In the Civil Code, he uses such terms as "expiry of the obligation", "performance of the obligation", "performance of the service" and "payment". We deal with "settlement of the obligation" when the obligation expires within the meaning of the Civil Code and the creditor does not suffer any financial damage, ie the property interest of the creditor is satisfied. "Settlement of the obligation" is therefore a concept that includes both "performance" and "termination of the obligation" leading to the satisfaction of the property of the creditor. In our case, the taxpayer did not pay the liability, but only paid VAT. If the liability is not settled, the taxpayer will be obliged to apply a bad debt relief.

To sum up, the taxpayer should settle the entire liability in order not to have to benefit from bad debt relief. The mere settlement of VAT does not settle the entire liability and the taxpayer should correct the input tax if 90 days from the date of payment elapses. In this case, only part of the liability was settled.