VAT: Correction of tax base for irrecoverable debts in detail

The issue of irrecoverable debts and the related corrections to the tax base is discussed in connection with the original and new provisions of the VAT Act. The information explicitly stipulates that if a creditor’s receivable arose before the amendment’s effective date, but related insolvency proceedings were commenced after this effective date (i.e. 1 April 2019), it is necessary to proceed in accordance with the new regulation.

The GFD’s information draws attention to the fact that the amendment allows for the correction of the tax base for receivables included in the approved reorganisation plan, which was not possible under the original wording of the act.

The information also deals with the reporting of corrections in the creditors’ VAT returns and VAT ledger statements. Following the changes in the relevant provisions of the VAT Act, the XML structure of VAT ledger statements changed from 1 October 2019. Field “Corrections in respect of irrecoverable debt” in A.4. should be designated as follows:

• “N” – not a correction for irrecoverable debt
• “A” – a correction pursuant to Section 44 of the VAT Act effective before 31 March 2019
• “P” – a correction pursuant to Section 46 et seq. of the VAT Act.

The choice of correction parameters will also be reflected in VAT returns; the completion of returns has also changed accordingly.

The GFD also summarises the conclusions of the Court of Justice of the EU deriving from Judgement C-127/18 A-PACK CZ. The Czech VAT Act stipulates that a correction to a tax base for an irrecoverable receivable may not be made if the debtor is no longer a VAT payer. In the above judgment, the CJEU clearly states that this provision of the Czech act is contrary to the EU VAT Directive. If both the creditor and the debtor were VAT payers at the time a taxable supply was effected, but the debtor ceased to be a VAT payer between the date of this supply and the date conditions for the correction to the tax base for irrecoverable debt were met, the creditor has the right to make a correction.

The information about the correction in respect of irrecoverable receivables is complete and comprehensive; it therefore serves as useful guidance for creditors who consider making such corrections. It contains, among other things, detailed descriptions of various situations such as corrections relating to assigned receivables, restrictions regarding the tax base corrections, suspension of deadlines, additional corrections, cancellation of corrections made, and the determination of correction amounts. It also deals with conditions for making a correction of a VAT deduction by the debtor.