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With effect from 2017, the VAT rules relating to bad debts and unpaid creditors have been simplified.
Accounts receivable
Most businesses issue invoices for their outgoing transactions (supplies of goods or services). The VAT shown on these invoices is paid to the tax authorities. A tax liability arises on the invoice amount claim against the customer: the debtor.
VAT must be paid in the tax return period in which the invoice was issued (invoice system). Even if the invoiced amount has not yet been received at that time.
Entrepreneurs who have the cash accounting[1] Under the current rules, they pay VAT on the amounts they have actually received during a tax return period. For them, the issue of bad debts described in this note is, of course, not relevant.
Overpayment of VAT
If the debtor fails to settle the claim, or does not settle it in full, too much VAT will have been paid. This can be reclaimed from the tax authorities.
Simplification
From 2017 onwards:
- the refund claim is processed as part of the regular VAT returns;
- assuming that the debtor will not pay, provided that, upon the expiry of one year if the invoice amount has not yet been received after the due date (the applicant is no longer required to prove that the debt will not be settled, either in full or in part).
Insofar as the debtor does eventually make payment, the VAT included in that payment is payable in the tax return period in which the payment was (eventually) received.
Accounts Payable
In respect of incoming supplies, businesses receive invoices from their suppliers. Provided that all the conditions are met, the VAT shown on these invoices may be deducted in the VAT return.
The total amount of the invoice gives rise to a amount owed to the supplier: the creditor.
VAT must[2] are deducted in the tax return period in which the invoice was received, even if the invoice amount has not yet been paid at that time.
Businesses that use the cash basis accounting system may choose to calculate VAT deductions on a cash basis.
Excess VAT deducted
Where the entrepreneur:
- receives a (partial) refund of the invoice amount;
- the creditor fails to pay, or fails to pay in full;
Too much VAT has been deducted. This VAT must be repaid to the tax authorities.
The excess VAT deducted is payable by law. The business must include this VAT in its regular VAT return for the relevant period:
- in which the invoice amount has been (partially) refunded;
- in which it is clear that payment will not be made (or the invoice amount has been refunded), but;
- no later than the period which falls one year once the invoice amount becomes due (the invoice becomes due on the day following the final payment date).
If this VAT payment is not accounted for, or is accounted for in the wrong tax period, the tax authorities may impose an additional VAT assessment, plus penalties for offences and failure to comply.
Insofar as the creditor is subsequently paid, the right to deduct VAT arises once again in the tax return period in which the payment is made.
Transitional law
The transitional provisions apply to payments that became due before 1 January 2017 but had not yet been received or paid at that time.
Accounts receivable
For all trade receivables due before 1 January 2017, the one-year period begins on 1 January 2017.
This means that the VAT on all accounts receivable:
- which were due on 1 January 2017 and;
- insofar as these have not yet been received by 1 January 2018;
can be claimed back in the VAT return for the first return period of 2018.
Accounts Payable
No transitional provisions apply to the payment of VAT on amounts owed to creditors that remain unpaid. The VAT on amounts owed to creditors that:
- were due before 1 January 2017 and;
- which are not paid;
is payable in 2017 during the tax return period:
- in which it is clear that payment will not be made (or the invoice amount has been refunded), but;
- no later than the period which falls one year after the invoice amount becomes due and payable.
For payments that became due in 2015, the date on which they became due is deemed to be 1 January 2016. Without this notional treatment, the VAT deducted in respect of these payments would not become payable. This tax loophole must, of course, be prevented.
Substitution
If the trader assigns their claim to another trader (for example, a factoring company), that trader takes the place of the trader who assigned the claim in respect of that claim. If the claim proves to be uncollectible, the acquiring business must claim a VAT refund using the form “Application for a VAT Refund (acquired claims)’.
The purpose of this note is to outline a scheme. For the sake of readability, matters have therefore been simplified. VWG is therefore not liable for the consequences of actions taken or not taken as a result of this memorandum.
[1] The cash-basis accounting system is compulsory for a number of designated businesses. This mainly concerns businesses that generally provide services primarily to private individuals. Non-designated businesses may apply to the tax authorities for permission to use the cash-basis accounting system.
[2] The deduction of VAT is so essential to the functioning of the VAT system that it is mandatory to deduct input VAT within the tax return period specified by law for that purpose.