Case law has allowed the extension of corrections for bad debts
09 January 2020
VAT payers who have an irrecoverable receivable in their accounts will be able to claim a refund of the tax paid to the state through a corrective document. The customer did not pay the service or goods to them and, in addition, stopped being a payer. The fact that the debtor has stopped to be a payer is a condition in the current wording of the VAT Act that prevents the adjustment of the tax base in the case of bad debts. Indeed, it is this limiting condition that the conclusions of the A-PACK CZ case law has abolished, which is also confirmed by the GFD's pre-Christmas announcement. However, the authors give the green light to the correction only if the debtor has stopped being a payer and explicitly point out that this cannot be applied to bad debts for debtors who were not payers at the time of the chargeable event. By doing so, they completely ignore paragraph 17 of the A-PACK CZ judgment, where the Court of Justice states: "the tax authority may not levy an amount of VAT in excess of that received by the taxable person." In other words, the VAT payer is only a tax collector who must render to the tax authority what it has collected, not send out "its own" funds to pay VAT, which it did not collect because it did not receive payment for the service or goods that included this specific VAT.
Although the case before the Court of Justice concerned Czech proceedings between A-PACK CZ and the Appellate Finance Directorate, the tax administration did not fully accept the interpretation of Article 90 of the EU Directive in the Court's judgment, but limited itself to remedying a specific case where the debtor was originally a payer and then stopped being a payer. Payers who have bad debts from debtors who were not payers at the time of performance will thus have to go through legal proceedings like A-PACK CZ to claim their rights, i.e. the possibility of correcting the tax base and thus recovering the tax.
It should be added that the GFD's aforementioned announcement on the correction of the tax base for bad debts, which was made possible by an amendment effective from 1 April 2019, is comprehensive. The coming time of annual accounts is when we usually reflect intensively on bad debts from the tax point of view. Therefore, it would be good to remember the possibility provided by the Value Added Tax Act and to examine, by looking into Section 46, whether a specific receivable can be corrected for the tax base and thus recover the originally paid tax. The option applies not only to situations where the debtor is in insolvency, but also to claims enforced by the executor or those included in the reorganisation plan. If you are unsure whether the repair can be done or how to do it correctly, we are happy to help. You can find more information here.