GFD information on reduction of VAT deduction for bad debts
At the beginning of July, the General Financial Directorate (GFD) issued its information on the correction of a VAT deduction for overdue receivables on a debtor's part, explaining the practical application of the new provision of Section 74b(3) of the VAT Act, which applies to the mandatory adjustment of the right to deduct VAT arising after 1 January 2025.
According to the new provision, VAT payers are obliged to reduce a deduction claimed on a received taxable supply when the related receivable remains unpaid even after six months after its due date: on the part of VAT payers to whom the obligation applies, this constitutes an unpaid debt. If the debt is subsequently paid, the debtor is entitled to reclaim the deduction even if the creditor has assigned the relevant receivable.
This subsequent re-increase in the deduction can be claimed within the standard time limit, i.e., before the end of the second calendar year following the end of the taxable period in which the payment was made.
The due date for VAT purposes derives from a relevant contract, terms and conditions, and other documents or legislation. The GFD’s information specifies that for debts with agreed-upon split maturity or payable in instalments, the six-month period is tested for each part separately. However, it must be proven that the obligation to reduce the claimed deduction has arisen for each part. Therefore, the GFD recommends keeping a record of the dates of overdue payables and their parts.
The GFD also recaps how to report a reduction of the claimed deduction and how to subsequently reclaim it in VAT returns and VAT ledger statements. As this is a unilateral adjustment concerning only the debtor, the GFD states that when reducing the deduction, it is possible to include in the VAT ledger statement the number of the original tax document or the number of the internal tax document used to make the reduction. However, a consistent approach must always be followed even if the deduction is subsequently increased again. In the VAT ledger statement, it is always necessary to add the symbol “P” to both the reduction and the increase when correcting the deduction. The date on which the tax is due shall always be the date of the original taxable supply, i.e., the supply that remained unpaid.
In the VAT return form, both the reduction and the increase in the right to deduct in respect of an overdue payable shall be shown in lines 40 or 41 and in informative line 34.
Quarterly VAT payers are a specific group. According to the GFD’s information, they are not subject to the obligation to reduce a deduction if payment is made no later than the last day of the taxable period. For example, if six months have passed since the due date in July 2025 and the quarterly VAT payer pays the liability at the end of September 2025, it is not necessary to make a correction in the VAT return for the third quarter of 2025. Such a correction would be meaningless as the deduction would be reduced and increased within the same return.
The GFD further confirms that the obligation to reduce a deduction does not apply to supplies subject to the reverse charge mechanism. The obligation to reduce a claimed deduction also does not arise for offsetting mutual receivables, to the extent of the payable that ceases to exist as a result of the offsetting.
On the other hand, the GFD states that the obligation to reduce a claimed deduction applies even if the payable remains unpaid due to pending complaint proceedings.
The GFD’s information also gives examples of the concurrent application of a proportional/reduced deduction with subsequent correction/settlement (increase in the coefficient) at the end of the year, and a reduction in the claimed deduction due to an unpaid debt. If a correction/settlement is made after the deduction has been reduced, no “additional” deduction may be applied as a correction.