On the occasion of the Circular 234 released by the Tax Authorities on 13 June 2019, this indirect tax update aims at summarizing and reminding the necessary information taxable persons need to be aware of, in applying the bad debts relief procedure. Circular 204 is replaced by Circular 234 with the addition of two new provisions.
Important changes in Circular 234 as compared to Circular 204
1. One of the conditions which was in force for claiming the bad debt relief for VAT purposes was that the debtor was required to have an active VAT number at the time when the claimant/supplier was claiming the bad debt relief. In accordance with the settle case law (C-127/18 - A-PACK CZ), the Court found that such condition is against Article 90 of the EU VAT Directive and thus it is not considered necessary that the debtor should be in possession of an active VAT number, at the time applying for the bad debt relief.
2. With the new Circular, a new obligation is introduced, under which, in addition to the obligation to notify the debtor within seven (7) days from the date of submission of the VAT return on which the claim is made, the Commissioner of Taxation should also be concurrently notified disclosing also the debtor’s VAT registration number.
Conditions for exercising the right to claim a bad debts relief for VAT purposes
- Earlier issuance of a VAT invoice in relation to the provision of services or supply of goods and accounting for the corresponding VAT in the relevant VAT period.
- The supplier has taken all necessary actions and measures to recover the amount due from the debtor.
- At least 12 months period should have elapsed from the time at which that the tax point occurred. The tax point is consider to be the time point output VAT becomes due based on the time of supply rules for services and or goods.
- The claim for the bad debt relief must be made within 4 years from the time at which the tax point occurred.
- To write off the relevant amount from the accounting records through the income statement (Profit & Loss Account).
- It is important to note that the write off of bad debts in a provisional account will not be accepted by the Tax Department. Specifically, the deletion should be made in the income statement under the name “Bad Debts” with a corresponding entry in the debtor’s own account or in a separate account called “Debtors written off in Income Statement”
- For easy and immediate identification in a tax audit, the input tax claimed from bad debts should be transferred to a special account called "input VAT account for bad debts"
- The bad debt relief amount should be claimed though Box 4 of the VAT return form.
- Where the debtor is a taxable person, he should be informed in writing within 7 days from the date of submission of the VAT return form on which the claim is made. Disclosure should also be made to the Tax Commissioner along with the debtor’s VAT number.
- The necessary records / evidences regarding the bad debts relief procedure should be kept for a period of 4 years from the date of the submission of the relevant VAT return i.e. a separate file listing names, amounts, invoice numbers and period the claim was made as well as journal entries affected.
- In case where the taxpayer applying the bad debt relief procedure is a natural person who is not obliged to prepare income statement and submit Financial Statements, the deletion should be made in the account “Bad debts- input VAT recovery account”.
Additional important information regarding the bad debts relief procedure
- In case of recovery of all or part of the amount due for which a previous request for bad debt relief was submitted, the creditor is obliged to account for output VAT on the amount collected at the time of collection by applying the rate applicable when the original transaction was affected.
- It is important to note that in case the applicant has claimed VAT through the bad debts relief procedure the debtor is not entitle to claim any input VAT.
Legal rights of the creditor for collection of the due amounts
- In case the creditor has proceeded with the bad debt relief procedure, he still has the right to proceed with legal or any other actions against the debtor.
- Provided the conditions for claiming bad debt relief are satisfied, the fact that the creditor has instigated other kinds of actions to recover the due amounts, his right to claim the VAT is not affected.
Indicative actions and measures for recovery of the outstanding debt
Below are listed some indicative 'necessary measures' that can be taken for recovering the outstanding debt (note that the list below is not exhaustive):
- Sending a letter to the debtor demanding payment of the due amount
- Sending a letter through a lawyer
- Assignment of collection to debt collection agencies
- Taking legal actions etc.
Insolvency of the debtor, uncovered cheques
- In case the debtor is insolvent or bank cheques issued are not covered, provided all the necessary conditions for applying the bad debts relief procedure are satisfied, the creditor could initiate the bad debt relief procedure and claim VAT. Specifically, the creditor could apply for the bad debt relief procedure since the amounts are considered uncollectable for accounting purposes. Where a receiver / manager has been appointed to manage the tax affairs of the debtor, the receiver / manager is obliged to make the necessary adjustment in the debtor’s books i.e. reduce the debtors input VAT account.
- In case that the creditor has enforceable guarantee against the debtor, the amount of debt to be written off is reduced by the amount of the guarantee (i.e. mortgage).
- It is clarified that uncovered cheques are not consider as enforceable guarantees.
Claim / Repayment by a bad debt relief applicant whose VAT registration has ceased to be effective
- In case where at the time a creditor becomes entitle to apply the bad debts relief procedure is already deregistered for VAT purposes and as result cannot submit VAT return forms to claim the bad debt relief, he could submit a written request to the Tax Commissioner in order to be advised how to proceed with his claim.
- In case where the applicant claims the bad debt relief and subsequently deregisters for VAT purposes and afterwards receives an amount from the debtor, he is requested to repay the relevant VAT amount following the instructions to be given by Commissioner of Taxation.
How can KPMG assist?
Should you like to further discuss the content and potential impact of the Circular to your business, please contact one of our trusted advisors from the Indirect Tax Department at KPMG Cyprus.
KPMG’s Indirect Tax team provides advice and assistance at the Cyprus and international level. We structure our effort to dovetail with your business issues and strategy. Our focus is on supplying value adding and pragmatic advice rather than just a list of recommendations.
Our tax professionals are able to review your company’s current tax position and provide relevant advice and planning on a range of indirect taxes, including VAT, customs duties and excise taxes (such as tax audits, reorganizations and acquisitions, etc.). Furthermore, we can help your company with its administrative obligations and contacts with administrative bodies.
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