CAUTION: The legislative amendment described in the article below came into force on 1 January 2017. You can read all about it in our factsheet Uncollectible debts and unpaid creditors.
VAT on bad debts. You’ll be familiar with this situation: you’ve supplied goods or services and issued an invoice. You’ve duly declared and paid the VAT in the month following the period in which the invoice was sent, but your customer hasn’t paid.
VAT refund on bad debts
You can ask the Tax and Customs Administration to refund the VAT on your bad debts. You must do this by submitting a separate request. You must not include this in a VAT return. The tax authorities usually scrutinise requests of this kind very closely and very often ask questions about them. In short, you will have to go to a great deal of trouble to get this VAT refunded.
When is a debt uncollectible?
A common point of contention with the tax authorities is whether it has been established that the debt is definitively uncollectible. If your client has gone into liquidation and the final liquidation proceedings show that your claims will not be paid, it is clear that these are irrecoverable claims. However, by that stage, a considerable amount of time has usually passed. And by no means do all situations involving uncollectible claims ultimately result in a definitively settled bankruptcy.
I suppose I’ll just have to issue a credit note then
The Tax and Customs Administration’s interest lies in your customer’s deduction of the VAT you have charged. If your customer does not pay your invoice, they must, of course, repay the VAT they have deducted to the tax authorities. However, when your customer is experiencing financial difficulties, it is very often the case that taxes also remain (partly) unpaid.
For this reason, the Tax and Customs Administration imposes very strict requirements on the supporting documentation for requests for VAT refunds on bad debts, as well as on credit notes. You must not only actually issue these to the customer. When you issue a credit note, you must also ensure that your customer reverses the VAT deduction.
Simplification
The government has a internet consultation A consultation has been launched inviting comments on ideas to simplify the scheme for VAT refunds on bad debts.
It is proposed that the right to a VAT refund on bad debts should, in any event, arise no later than one year after the date on which the payment became due. This is in line with the point at which your customer is obliged to repay the VAT that has been deducted. The point at which the debt becomes due must be determined on the basis of the terms of delivery applied.
Furthermore, under the proposed new scheme, the amount of the refund may be included in the VAT return for the period in which the right to a VAT refund on the bad debts arose. Should the debt ultimately be paid after all, the VAT must, of course, be paid again.
Finally, the right to a VAT refund on bad debts passes to the trader to whom you assign your receivables.
Entrance
The proposed simplified scheme for VAT refunds on bad debts is (for the time being) due to come into force on 1 January 2017. Naturally, the scheme still has to be approved by Parliament.
For claims that became due before 1 January 2017, the one-year period is deemed to have commenced on 1 January 2017.