Bad Debt Relief in VAT – How to Avoid Fiscal Losses and Recover VAT

The article covers:

1. The concept of bad debt relief in VAT.
2. Conditions for deducting VAT on uncollectible receivables.
3. The timing of applying bad debt relief.
4. Consequences for the debtor in the event of non-payment.
5. Key CJEU judgments concerning bad debts relief.

Definition of Bad Debt Relief in VAT

Bad debt relief allows entrepreneurs to reduce the tax base and output VAT in the case of receivables that have not been settled by contractors.

Pursuant to Articles 89a–89b of the VAT Act, a taxpayer may adjust the tax base and output VAT on the supply of goods or services in Poland if the uncollectibility of the receivable has been made probable. The adjustment covers receivables that have not been settled or transferred in any form within 90 days after the payment deadline specified in the contract or on the invoice.

Conditions for deducting VAT on Bad Debt Relief

VAT deduction is possible if the following conditions are met:

1. On the day preceding the submission of the tax return in which the adjustment is made, the creditor is registered as an active VAT taxpayer.
2. Three years have not elapsed since the issuance of the invoice documenting the receivable, calculated from the end of the year in which the invoice was issued.

In the case of receivables from entities that are not active VAT taxpayers (consumers or VAT-exempt taxpayers), the tax base adjustment may be made if:

• the receivable has been confirmed by a final court judgment and referred for enforcement,
• the receivable has been entered in the national debt register,
• consumer bankruptcy has been declared against the debtor under separate regulations.

Timing of Applying Bad Debt Relief

The adjustment under the relief should be made in the settlement for the period in which the uncollectibility of the receivable was deemed probable, provided that by the date of submitting the VAT return the receivable has not been settled or sold.

If the receivable is subsequently settled, the creditor is required to increase the tax base and output VAT proportionally to the settled amount. The adjustment should be reported in the JPK_V7 file in the field “KorektaPodstawyOpodt”.

Consequences for the Debtor

A debtor who fails to settle the receivable within 90 days after the payment deadline is obliged to adjust the deducted input VAT in the settlement for the period in which the deadline expired.

If the debtor settles the receivable after the creditor has made the adjustment, the debtor is entitled to proportionally increase the input VAT in the period in which the payment is made.

Key CJEU Judgments on Bad Debt Relief

1. C-335/19 – E. sp. z o.o. sp. k. (Poland, 5 October 2020)
   The CJEU held that Polish regulations on bad debt relief were overly restrictive and violated the principle of VAT neutrality. The judgment enabled VAT adjustments in the case of contractors’ insolvency and forced changes to national regulations.
2. C-127/18 – A-PACK CZ s.r.o. (Czech Republic, 8 May 2019)
   The Court stated that Member States may not refuse an adjustment of the tax base solely because the debtor lost VAT taxpayer status, strengthening the creditor’s right to deduct VAT regardless of the contractor’s status.
3. C-314/22 – Consortium Remi Group AD (Bulgaria, 29 February 2024)
   The judgment confirmed the taxpayer’s right to effectively adjust tax in the case of unpaid receivables and the right to interest on unduly retained VAT, limiting Member States’ discretion to introduce restrictions.

Summary

Bad debt relief in VAT is an essential tool for businesses to protect their cash flow and minimize fiscal losses from uncollectible receivables. By understanding the rules, meeting the required conditions, and correctly timing adjustments, companies can recover VAT efficiently while complying with legal obligations. Monitoring payment deadlines and keeping accurate records is crucial, and the CJEU case law reinforces taxpayers’ rights, ensuring that national regulations do not unduly restrict VAT recovery. Proper application of bad debt relief can significantly reduce financial risk and support the stability of business operations.