If debts are uncollectible, the VAT paid may be reclaimed from the tax authorities. What rules apply in this regard?
Invoicing system
Most businesses pay the VAT due on their supplies under the invoicing system. This means that VAT must be paid in the tax period in which the invoice was issued. As a result, VAT often has to be paid before the debtor has settled the invoice amount.
Businesses that use the cash accounting scheme do not encounter this problem. They pay VAT in the period in which the debtor pays them. The cash accounting scheme must be used by a number of designated sectors (who, incidentally, may opt out of the cash accounting scheme). Other traders may opt for the cash accounting scheme, provided they supply goods and services (almost) exclusively to non-traders. The cash accounting scheme applies only in respect of the VAT payable.
Bad debts
If the invoice amount is not paid (or not paid in full) by the debtor, it is unreasonable that the full amount of VAT should still be payable. That is why the law in this situation, a right to a refund of the excess VAT paid. The right to a refund arises at the time when:
- it has been definitively established that the debtor will not pay;
- but in any event, once one year has elapsed since the compensation became due and payable.
The refund is included in the VAT return for the period in which the right to a refund arose. If it is subsequently established that a right to a refund exists, the rules on supplementary VAT returns must be applied. If and to the extent that the debtor subsequently makes payment, the VAT refunded remains payable.
Pay
The invoice amount is, of course, paid when the debtor transfers a sum of money. But it is also paid when payment is made in cash or in kind. One method of payment that is not always recognised in practice is the conversion of the receivable into a loan. If the loan is subsequently not repaid (in full), there is no longer any entitlement to a VAT refund.