You are still waiting for payment from a client, the due date passed a long time ago, and yet you have already had to pay the VAT due on that invoice to the tax office. Sound familiar?
Payment backlogs are unfortunately a common problem for many businesses and can seriously affect cash flow. Fortunately, Polish VAT regulations provide a mechanism that allows you to adjust the VAT due on unpaid sales and reduce your tax burden. This mechanism is known as bad debt relief.
How exactly does it work, and when can we apply it in your business? We have prepared a brief summary of the most important rules.
When does a debt become “bad”? The key 90 day threshold
You may use bad debt relief if 90 days have passed since the payment due date and the amount remains unpaid and has not been transferred or sold.
Under Polish tax regulations, this means that the debt is considered sufficiently likely to be uncollectible.
Importantly, you do not have to wait until the entire amount becomes uncollectible. The relief also applies when your client has paid only part of the invoice. In that case, we adjust the VAT proportionally to the amount that remains outstanding.
What conditions must you meet as a creditor?
Before you send us an invoice for adjustment, we need to make sure that several statutory requirements are met.
To recover VAT, on the day preceding the submission of the tax return in which the adjustment is made, you must:
be registered as an active VAT taxpayer,
ensure that no more than three years have passed since the invoice documenting the debt was issued, counting from the end of the year in which the invoice was issued,
ensure that the amount remains unpaid and has not been transferred or sold on the date the JPK_V7 return is submitted.
If your client pays after the 90 day period has passed but before the relevant VAT return is submitted, the possibility of applying the relief must be assessed taking that payment into account.
What if your debtor is a private consumer or a business exempt from VAT?
The good news is that the regulations also allow bad debt relief when the debtor is a consumer, a VAT exempt taxpayer, or another entity that is not registered as an active VAT taxpayer.
However, additional conditions must be met.
We may adjust the VAT if you can demonstrate that at least one of the following conditions applies:
the debt has been confirmed by a final court ruling and referred for enforcement proceedings,
the debt has been entered in a debt register maintained at national level,
consumer bankruptcy has been declared in respect of the debtor.
The other side of the story: the debtor’s obligations
Bad debt relief also has another side.
Polish VAT regulations impose separate obligations on a purchaser who deducted VAT from an invoice but failed to pay the amount due on time.
The debtor’s obligation arises regardless of whether the seller has actually used bad debt relief.
This means that if you previously deducted VAT from an unpaid invoice, you must adjust that VAT.
The adjustment is made in the VAT settlement for the month or quarter in which the 90th day after the payment due date falls.
There is one important exception. If you pay the outstanding amount no later than the last day of that settlement period, the adjustment is not required.
What happens if the client eventually pays?
Business life can be unpredictable.
Let us assume that we applied bad debt relief for you, adjusted the VAT, and a few months later the debtor unexpectedly makes the payment.
If the amount is paid after the relief has been applied, we must increase the taxable base and VAT due again in the settlement period in which the payment was made.
If the client pays only part of the debt, the adjustment is made proportionally to the amount received.
A similar obligation arises if the debt is transferred or sold.
If you were the debtor and had previously adjusted the VAT you deducted, once you pay the outstanding amount you may increase your input VAT again in the settlement period in which the payment is made.
If only part of the amount is paid, the VAT may be deducted again proportionally.