Recovering VAT on bad debts in 2025

The first positive change is the shortening of the period after which in certain cases the tax base can be corrected. Specifically, for claims registered in enforcement proceedings, this period has now been reduced from the previous two years to one year after the first enforcement order has been issued. Also, for insolvency and enforcement proceedings that take longer, the tax base can be corrected after three years (rather than the original five years) after the end of the taxable period in which the original taxable supply took place.

The amendment also extends the scope of unrecoverable claims to those that have not been registered in insolvency or enforcement proceedings but have become unrecoverable due to the debtor's apparent lack of assets. In such cases, it is up to the creditor to prove the debtor's insolvency and defend the correction of the tax base before the tax administrator. A subtle change with a relatively significant impact is the abolition of the condition that the debtor must be a VAT payer. Even the creditor does not have to be a VAT payer at the time of the correction of the tax base (provided, of course, that they were a VAT payer at the time of the original transaction). The time limit for correcting the tax base remains unchanged (i.e. 3 years from the original transaction, not running during enforcement, insolvency or similar proceedings).

The most discussed change is the introduction of the possibility to correct the tax base for "small claims". The creditor may make a correction to the tax base in the amount of the unreceived consideration if the following conditions are met:

1. The claim does not exceed CZK 10,000 including VAT, on individual basis.
    
2. The claim is at least 6 months overdue.
    
3. The creditor has requested the debtor to pay the claim, in writing, at least twice, and is able to prove this.
    
4. For a calendar year, the aggregate of claims against one debtor for which the creditor has applied the tax base correction does not exceed CZK 20,000 including VAT.

While the amendment has somewhat relaxed the rules concerning bad debts for creditors, it has brought some stricter measures for debtors. From the new year, debtors must keep records of received tax documents that they did not pay and that are overdue. If a received tax document is not paid (even partially) by the last day of the 6th calendar month following the month in which the tax document became due, the debtor will have to reduce the VAT deduction claimed (in proportion to the unpaid amount).

Let's illustrate this on an incoming invoice with a due date of 14 January 2025 that has not been paid by 31 July 2025. The debtor who has claimed a VAT deduction on the invoice shall make a correction to the deduction claimed in their regular VAT return for the July 2025 taxable period on line 40 or 41, with a minus. If it is subsequently paid (fully or in part), the debtor may increase the deduction again, in the same manner – in the taxable period in which the subsequent (partial) settlement took place. Please note that this provision only applies to debtors. Creditors, on the other hand, do not have the right to correct the taxable amount solely based on an unpaid claim (exception for ‘small claims').

Finally, please note that the General Financial Directorate has promised to update the 2019 information on bad debts but has so far not issued such an update. Based on the GFD's general information on the amendment to the VAT Act of 1 January 2025, we believe that all mentioned changes apply to transactions made after 1 January 2025. To supplies made before that date, the legislation in force at the time of the original supply should apply.

We will continue to monitor the situation and keep you informed of any developments.