Bad debt allowance (Tax alert - 1/2013)
Changes in application of bad debt allowance
On 1 January 2013 principles of applying bad debt allowance changed. The main objective of the modification was to make the application of the allowance easier and to introduce incentives for debtors to repay their debts within pre-set deadlines.
Bad debt allowance from the creditor’s perspective
The changes are advantageous for taxpayers who have not received payment for goods sold or services delivered. First of all, the period that must pass ineffective after the payment deadline as indicated in a contract or invoice to allow the taxpayer to use the allowance has been reduced from 180 to 150 days. Another important change involves elimination of the obligation to inform the debtor about the creditor's intention to use the allowance. The taxpayer is only obliged to inform the tax authorities competent for its registered office about having applied the allowance. Elimination of the obligation to notify the debtor should significantly simplify the allowance application and reduce taxpayer’s administrative burden.
How to apply bad debt allowance
The amended act has refined the other terms of bad debt allowance application. In particular, in line with the new regulations, taxpayers cannot use the allowance if as at the date of its use, their business has been declared bankrupt or in liquidation. Previously, being declared bankrupt or in liquidation as at the transaction date was the only condition precluding the allowance application. At present, taxpayers will have to additionally verify the standing of their contractors, and the use of the allowance will be impossible if after the transaction date, the contractor’s standing has deteriorated resulting in bankruptcy.
Bad debt allowance from the debtor’s perspective
The use of the bad debt allowance from the debtor’s perspective has changed significantly, too. Previously, debtors were obliged to adjust the formerly calculated input VAT if their creditors applied the allowance. Following the amendments, the adjustment on the debtor’s side will be automated, regardless of the actual use of the allowance by the creditor. If a debtor has failed to pay its invoice within 150 days from the deadline, it will be obliged to adjust the deducted input VAT arising from the related invoice. Importantly, debtors will not receive from creditors any documents confirming that the payment deadline has passed. Therefore, debtors should monitor payment deadlines related to their purchases. The input VAT adjustment should be made on an ongoing basis, i.e. in tax returns for the period when the 150th post-deadline day has passed. Unlike imposed by former provisions, no retrospective adjustments of tax returns related to the tax arrears will be necessary. If a debtor fails to make the adjustment, tax authorities shall fine it with 30% of the deducted input VAT on the related transaction.
Should you be interested in detailed information regarding application of the bad debt allowance after amendments effective from 1 January 2013, you are welcome to contact Deloitte specialists.