BAD DEBT RELIEF - HOW TO RECOVER PART OF YOUR RECEIVABLES?

Bad debt relief is a solution that allows for the reduction of the tax base and tax due in cases where receivables remain unpaid but a tax obligation has already arisen. This benefit applies to both VAT and CIT, enabling businesses to effectively and quickly recover at least a portion of the debt. In the case of large contracts, this can help a company survive a cash flow crisis. This relief can be used 90 days after the due date of the unpaid invoice.

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Reasons for changes due to EU legislation

A ruling by the Court of Justice of the European Union (CJEU) on October 15, 2020 (C-335/19) introduced regulations that aligned Polish law with EU legislation. The most significant changes include: the debtor no longer needs to be a registered VAT taxpayer, the restriction preventing the use of bad debt relief if the debtor is undergoing insolvency or liquidation has been removed. These seemingly minor changes have significantly improved the conditions for applying the relief and have greatly benefited creditors.

The biggest change – possibility of applying the relief for transactions with consumers

Due to the removal of the VAT taxpayer requirement, businesses can now claim refunds for transactions with consumers. Previously, this was not possible in Poland, as only VAT-registered entities could benefit from the relief. This major change was introduced by the CJEU ruling of October 15, 2020 (C-335/19).

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Bad Debt Relief – VAT

According to Articles 89a-89b of the VAT Act, if a taxpayer can demonstrate that a receivable is unlikely to be collected, they are allowed to adjust the tax base and the amount of VAT due for the supply of goods or services.

To qualify for this relief, two conditions must be met: on the day before submitting the tax, declaration in which the correction is made, the creditor must be a registered VAT taxpayer. no more than three years have passed since the end of the year in which the invoice was issued.

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Bad Debt Relief – CIT

For businesses subject to CIT (Corporate Income Tax), the tax obligation may arise even before the payment due date. Thanks to Article 18f and Article 25(19) of the CIT Act, companies can reduce their tax liability by lowering the tax base in a similar manner to VAT relief.

The deduction can be applied in the year when 90 days have passed since the due date, the same as in the case of VAT.

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Bad Debt Relief – PIT

According to Article 26i of the PIT Act, bad debt relief also applies to personal income tax (PIT) payers. This provision allows taxpayers to reduce their taxable base by the value of receivables that have been outstanding for at least 90 days.

However, if the debtor eventually makes a payment, the taxpayer is required to adjust their tax return in the next annual declaration.

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What benefits can be expected?

It is worth reviewing past transactions and their values. If any unpaid invoices were overlooked, a claim for a refund, including interest, can be submitted. The statute of limitations for such claims is five years, meaning taxpayers can request a refund for transactions from up to five full years back.

Pros and cons of the solution

The main advantages of the solution are improved financial liquidity, reduced tax losses, motivation for debtors, and accessibility for a wide range of entrepreneurs.

However, it is also important to mention the disadvantages of the relief, such as formal barriers, time limitations, no guarantee of full debt recovery, and the need to monitor debtors.

In the future, changes can be expected due to harmonization with EU regulations, which will lead to greater flexibility in applying the relief.

Despite formal difficulties and time constraints, it is worth trying to recover at least part of your receivables.