Relief for bad debts enables the recovery of taxation on unpaid income invoices. In order to benefit from it, it is essential to be a VAT taxable individual and income taxation PIT or CIT. An active VAT taxable individual may apply a credit for bad debts in settlement for the period during which the claim is irrecoverable and erstwhile the claim paper is issued no more than 3 years before the end of the year in which it is settled. The relief for bad debts in PIT and CIT aims to improve the financial liquidity of companies, frequently limited by counterparties who acquisition services/goods but will not settle financial obligations for them.
Who is relieved of bad debts in VAT?
Pursuant to Article 89a(1) and (1)a of the Act of 11 March 2004 on the taxation on goods and services, Dz. U. of 2022 item 931, the taxable individual may adjust the taxation base and the taxation due for the supply of goods or services in the case of claims whose irrecoverability has been similar.
The taxation adjustment besides covers the taxation bases and the amount of the taxation per part of the amount of the claim, the irrecoverability of which is similar. The irrecoverability of the claim shall be considered to be akin in cases where the claim has not been settled or disposed of within 90 days of the expiry of the deadline for payment specified in the contract or invoice.
In order to benefit from the relief for bad debts, the creditor must fulfil the conditions set out in Article 89a(2) of the VAT Act:
- on the day preceding the date of submission of the taxation return on which correction is made under the relief for bad debts
- 3 years have elapsed since the date of issue of the invoice documenting the claim from the end of the year in which it was issued
In the case of the supply of goods or services to an entity another than an active VAT taxable person, namely the consumer or a taxable individual exempt from VAT, pursuant to Article 89a(2a) of the VAT Act, a taxation adjustment may be made where:
- the claim has been confirmed by a final judgement of the court and directed towards the way of enforcement, or
- the claim has been entered in a national debt register, or
- Consumer bankruptcy was declared against the debtor under separate rules
Mandatory adjustment of the debtor
In the event of failure to pay an invoice for the supply of goods or services in the territory of the Republic of Poland within 90 days of the expiry of the deadline for payment specified in the contract or invoice, the debtor shall be required to adjust the deduction of the amount of taxation resulting from that invoice for the period during which the 90th day has elapsed from the date of expiry of the deadline for payment specified in the contract or invoice. specified adjustment shall not be essential if it settles the charge at the latest on the last day of the accounting period on which the 90th day has elapsed from the date of expiry of the payment deadline of that commitment.
On the another hand, erstwhile the debtor settles the claim after that adjustment, he has the right to increase the amount of input taxation charged in the settlement for the period during which the charge was settled. In the case of partial settlement of charges, the input taxation may be increased for that part.
Relief for bad debts for PIT and CIT
The rule of operating the relief for bad debts in the case of PIT and CIT is akin to that in the case of VAT, although there are any insignificant differences. The anticipation of reducing the taxation base concerns the amount of outstanding invoices and contracts that stay unpaid for 90 days after the deadline for payment.
The relief was introduced by a law amending certain provisions to reduce payment congestion from 1 January 2020 and refers to CIT and PIT taxpayers.
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Daniel Głogowski
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Relief for bad debts – step by step
