The so-called bad debt tax relief, i.e. possibility to adjust tax in the case of bad debts, is one of the mechanisms that reduce the negative impact of payment backlog for the functioning of the company. The mechanism is described in Article 89a of the Act on the goods and services tax.
If your creditor (the person liable for the payment of an invoice) has failed to pay, you are entitled, under certain conditions, to reduce the amount of tax due by the value of VAT on an invoice covered by relief.
It works both ways — if you are the debtor (the person liable for payment) and you don't settle the payment within deadline, you are obliged to correct VAT (increase the amount of VAT due, i.e. to pay higher tax).
Reducing the tax due - formal conditions
You should keep in mind that the bad debts relief can be used for invoices issued for active VAT payer. The easiest way to verify this fact is to check the VAT status of entity through the website of the Ministry of Finance.
The second formal condition is that a supply of goods or provision of services covered by the invoice had taken place in Poland.
As a creditor, you must also prove that the debt is irrecoverable. This is simple - it is sufficient that your debtor has been in arrears with the payment for more than 150 days, and the claim has not been not sold.
Important is also the date when the invoice has been issued — the so-called relief in respect of bad debts can be used when starting from the end of the year in which the invoice was drawn up have not passed two years.
Before you make adjustments, you must also check whether on the day before the submission of documents your debtor is still an active VAT-payer who is not in the process of restructuring proceedings, insolvency proceedings or in liquidation.
The last condition to be fulfilled - at the date prior to the submission of the adjusment statement you must also be an active VAT payer.
What else you should know
VAT adjustments is an ongoing process in the immediate return. No correction is made for already submitted declaration, in which VAT on unpaid invoice was taken into account.
If your counterparty settles claim after 150 days but before submitting your corrections - the relief is devoid of purpose and cannot be used.
Equally, if you sell claim to another body, you do not have the right to a correction, even if the claim had been sold for a fraction of its value.
Correction shall be made by submitting an annex to the VAT return. This is VAT-ZD form - notification of the correction of the tax base and the amount of tax due.
When carrying out the correction in VAT-ZD you give data of the debtor and information on unpaid invoices and amounts of tax.
When the contractor has paid after the correction
If corrections have already been made and the counterparty settled debt, you are required to make return correction - increase the amount of VAT due by the amount from the settled invoice. This is done for the period in which the debtor made payment.
If the payment was made in part - a proportionate correction of VAT is made.
If you are in arrears with payment
If you are the debtor - in arrears with payment of the invoice more than 150 days starting from the date of the payment, you are obliged to make an adjustment of the VAT due in such a way that for the period during which the 151 day from the date of payment you increase VAT due by the amount of tax from unpaid invoice.
If you partly settle liability before the 150th day, the correction affects only the input tax in respect of the unpaid amount.
If you settle debt after the compulsory adjustment, for the period in which the payment was made, you have the right to increase the amount of input tax (lower your tax by the amount of tax from the paid invoice). In the case of partial repayment correction shall be made on a pro rata basis.
When the debtor does not have to make corrections
Article 89b of the goods and services tax act lays down several exceptions, when as a debtor, you do not need to make adjustments to the return. Firstly, there is no obligation to make an adjustment if the debt is paid after the 150th day but before the end of the settlement period, for which the VAT declaration is made (month or quarter). Secondly, you do not need to correct the declaration because of unpaid invoices, if at the end of the month in which expires 150th day from date on which the payment is due, your company is in the process of restructuring proceedings, insolvency or liquidation.
What is the penalty for lack of correction
If the tax authority finds that an adjustment increasing the tax due has not been made, it will set an additional tax liabilty corresponding to 30 % of the amount of the tax. That penalty shall apply only to legal persons - companies and other entities included in the National Court Register. Its application implies that the taxable person must adjust declaration (by increasing tax due), and to pay additionally 30 % of the amount of that tax.
Additional liability is not imposed on natural persons. Natural person who has not made adjustments in due time is subject to criminal sanctions under Tax Penal Code.
More information on bad debt tax relief can be found here.