Late payments are common in business dealings. Bad debt relief aims to prevent payment backlogs and limit their adverse financial consequences for businesses affected by unreliable counterparties.
Every business has encountered a counterparty that evades its payment obligations. Sometimes debtors themselves pay late through no fault of their own: they have not paid because their own customers have not paid them. This is how payment backlogs arise. Whatever debtors’ good intentions and payment discipline, tax consequences arise as soon as goods are supplied or services performed. Non-payment does not alter when revenue is recognised or when VAT becomes chargeable. Bad debt relief provides assistance to businesses in this position.
PIT and CIT
VAT bad debt relief is an established mechanism and has been available in its current form for a year. The new development is simplified bad debt relief for personal income tax (PIT) and corporate income tax (CIT), which does not require court proceedings. It operates in a similar way to the familiar VAT mechanism.
How can relief be claimed?
The relief covers receivables that have neither been transferred nor paid, as referred to in the Act on Counteracting Excessive Delays in Commercial Transactions. It therefore concerns unpaid consideration for supplies of goods or services for payment.
Where payment is more than 90 days overdue, the taxpayer may reduce the tax base by the overdue amount or add it to the tax loss. If the receivable exceeds the tax base, the relief may be applied in subsequent tax periods over 36 months.
The tax base is reduced, or the loss increased, in the annual tax return. However, the income used to calculate an income tax advance payment may already be reduced when that advance payment is determined.
PIT bad debt relief applies to receivables falling due on or after 1 January 2020.
Restrictions on PIT/CIT relief
Relief cannot be claimed if:
- the debtor is undergoing restructuring or insolvency proceedings, or is in liquidation, on the last day of the month preceding the month in which the tax return is filed;
- as a rule, at least two years have elapsed since the end of the year in which the invoice was issued or the agreement confirming the receivable was concluded;
- the debtor is subject to neither PIT nor CIT.
VAT
A similar mechanism has been introduced in the VAT Act. Under the relief, a taxpayer may adjust the taxable amount and the output VAT attributable to the unpaid receivable or part of it, once 90 days have elapsed after the payment deadline shown on the invoice. The taxpayer need only submit form VAT-ZD with the VAT-7 return. This adjustment may be made for invoices from the last two years.
Restrictions on VAT relief
Relief cannot be claimed if:
- the debtor is undergoing restructuring or insolvency proceedings, or is in liquidation, on the day before the tax return is filed;
- the debtor is not registered as an active VAT taxpayer on the day before the tax return is filed;
- two years have elapsed since the invoice was issued.
Payment backlogs threaten the development of SMEs. Bad debt relief is one of the tools used by the legislature to tackle this problem. If this topic interests you, please see our articles of 14 December 2018 and 27 December 2018, in which we discussed the proposed legislative changes in this area.
