Unfortunately, every company is confronted with outstanding customer receivables at year-end. Sometimes this is simply an oversight on the part of the customer, but it may relate to amounts whose collection is in doubt because the customer disputes the invoice or is experiencing financial problems. In the latter case, the question arises how and when you can reflect this loss in your bottom line.
This is because losses on trade receivables are only tax-deductible when they are certain and established. Once this proof can be provided, the loss is a deductible expense for the financial year in which it has become certain.
We briefly examine this question based on the different stages, starting from an ‘uncertain receivable’ (‘doubtful debt’) until the moment when the loss is certain.
To avoid problems during a tax audit, it is very important to conduct a thorough evaluation of all outstanding customers every year and to take the appropriate action in good time.
We speak of an ‘uncertain receivable’ when there is uncertainty about the payment of all or part of the receivable on the due date.
The governing body is then responsible for making a correct assessment of the debt’s collectability. If this is uncertain, the receivable can be transferred to Account 407 Doubtful debts.
An assessment must then be made of its recoverability. For the part that is assessed as at risk, a provision may be made in Account 6340 (D) & 409 (C) “Impairments on trade receivables”, removing the uncertain receivable from the result. This does not have to be for the entire receivable: for example, 50% of the amount might be treated in this way, depending on the assessment of the risk. Although the receivable is in principle recorded at its nominal value (i.e. including VAT), the impairment on this receivable must be recorded excluding VAT, as the VAT can in principle be reclaimed later on once the conditions for doing so have been met.
In order to be deductible (for tax purposes), the impairment must have been recorded as a response to clearly defined losses that are probable in light of the current situation; this probability must be demonstrated on the basis of specific circumstances that arose during the taxable period (not on the basis of a risk of a purely general nature, in other words). They must also be individually identifiable: overall or flat-rate impairments are therefore not deductible. To ensure tax-deductibility, the necessary supporting documents (for example correspondence with the customer) must be kept available for the tax authorities. Keeping these supporting documents is also vital for the later recovery of VAT.
The debt’s doubtful nature must be demonstrable and the total amount must also be justified in a declaration 204.3 appended to the corporate tax return. The exemption from tax remains valid as long as the taxpayer can demonstrate the probability of the loss. Once the loss is final, or once the expected loss can no longer be justified, the impairment must be reversed and the amount will be recorded as profit in the taxable period of the reversal.
If the debt proves impossible to collect despite several reminders (and possibly after using additional means to collect the debt), further steps may be considered.
If the creditor can demonstrate that it has made sufficient efforts to collect the outstanding balance, but the debt remains unrecoverable, the VAT may be reclaimed in advance. This can be done through the periodic VAT return, provided that a ‘corrective document’ (or credit note) is issued to the customer for the recoverable amount with a reference to the supporting documentation showing that every effort has been made to recover the debt. Booking the amount as “Impairments on trade receivables” is not in itself sufficient evidence to justify the recovery of VAT. In practice, it is advisable to have the VAT inspection office confirm that the collection steps taken are sufficient to recover the VAT.
Usually this will not be enough to convince the corporate tax inspector that the debt can be definitively written off, so the provision must be retained (and included annually in declaration 204.3).
If some or all of the uncertain receivable is subsequently paid, VAT, included in the sums, must be paid back by the creditor. The VAT must then be included in the amount of VAT due in respect of the period in which the payment was received. At that point, the recorded impairment must also be reversed in order to include the paid portion in the result, for both accounting and tax purposes.
If a customer decides to undergo judicial reorganisation, the collection of the outstanding invoices depends on the type chosen. The outstanding receivables and the recorded impairment must then be adjusted based on the outcome of these procedures. We refer to our article on this subject.
There are three types of reorganisation, each with its own consequences for receivables.
The debtor concludes an amicable agreement with at least two creditors under the supervision of a specially appointed judge who will approve the agreement and declare it enforceable. The agreement is only binding for the parties involved. The court may also grant softer payment terms and force creditors to grant a postponement. The company will enjoy protection against its creditors for a maximum of six months (extendable to 18 months).
The VAT on receivables whose reduction was recorded in the agreement is reclaimable on the date of the judgment establishing the amicable agreement; again, of course, this is on condition that a corrective document (or credit note) is issued to the customer for the recoverable amount
The debtor tries to reach an agreement with all creditors and a reorganisation plan is drawn up to pay off the debts in whole or in part within a maximum of five years. If the plan is accepted and implemented, the company will continue to exist and any remaining debts will be forgiven. The plan can only be approved if the majority of creditors agree. Once the plan has been approved by the court, it is binding on all creditors.
The VAT on receivables whose reduction was recorded in the reorganisation plan is reclaimable on the date of confirmation by the court. Again, a corrective document or credit note must be issued for this purpose.
At the debtor’s request, a legal representative is appointed by the business court. This representative’s task is to turn existing assets and/or activities into cash. In the majority of cases, the company is declared bankrupt or liquidated in deficit after the transfer.
The VAT on receivables that could not be settled as a result of the transfer is recoverable on the date of the ruling closing the procedure of judicial reorganisation by transfer under judicial authority. Again, a corrective document or credit note must be issued for this purpose.
If a customer is declared bankrupt or goes into liquidation, it is important to submit a declaration of the claim to the liquidator as soon as possible. The latter will then check whether there are sufficient resources to pay all creditors (in whole or in part) at the conclusion of the bankruptcy or liquidation.
In the event of bankruptcy, the VAT paid can be reclaimed from the date of the bankruptcy ruling. In other words, it is not necessary to wait for the conclusion of the procedure and the creditor does not have to issue a corrective document (or credit note) in order to reclaim the VAT. Unfortunately, there is no provision for a similar special arrangement for liquidations, where the general rule applies (see above) and a corrective document must therefore still be issued.
There are different types of creditors: specifically preferential creditors (e.g. mortgage lenders, lien creditors, etc.), generally preferential creditors (the liquidator, personnel, the VAT and tax authorities, social security) and non-preferential creditors (ordinary creditors).
Most suppliers are ordinary creditors and will therefore end up at the back of the queue. In this context, we would also like to stress the importance of including a clause specifying retention of title on the delivery of goods in your general terms and conditions of sale. This means that the goods remain the seller’s property until they have been paid for in full. If payment is not made, the seller can reclaim the goods through its retention of title. This can be done even after the buyer has been declared bankrupt.
The conclusion of bankruptcy or liquidation is the most obvious situation where bad debt status is certain and established. The moment at which the settlement of the customer’s bankruptcy is concluded is decisive here.
Once the creditor is in possession of the judgment of bankruptcy or an individual certificate from the liquidator showing that the claim in question has been completely and definitively lost, the loss can be considered certain. From an accounting point of view, the loss is then booked to a 642 account (Loss on the realisation of trade receivables), the provision is reversed and it disappears from declaration 204.3. In principle, this has no impact on your accounting (and tax) result.
The loss is a deductible expense for the financial year in which it has become certain and established (the annuality principle). If a receivable is not written off in the year in which it is definitively lost, there is a risk that the tax authorities will no longer accept the deduction.
