Bad debt and VAT (Value Added Tax) – new style
Tuesday, September 27th, 2016 by Arnold Waal
A bad debt and VAT entrepreneur implies, an entrepreneur issued an invoice to another company or person but is not being paid. The entrepreneur who issued the invoice needs to pay the VAT on that invoice to the Dutch tax office immediately. Whether the invoice is paid or not. Sometimes a client does not pay the invoice at all. Can the VAT be reclaimed?
Bad debt and VAT Old style- up to and including 2016
The entrepreneur who would like to claim back the paid VAT over an unpaid invoice, needs to start a procedure. In writing the Dutch tax office needs to be requested for compensating the non paid VAT in the following VAT return.
The Dutch tax office only grants such a request if the entrepreneur can show everything was done to collect the bad debt. Everything implies going to court either to claim bankruptcy on the non paying client or obtaining a right to seize employment income.
In our experience most clients know already that even if they go to court, there is simply no money to pay for the outstanding debt. Then the costs involved to go to court for a decision that will not yield any outcome is too much. The result is that a compensation of the already paid VAT to the Dutch tax office is denied.
Bad debt and VAT New Style – starting from January 1, 2017
The rules have changed as per January 1, 2017. From that moment it is assumed that when a debt is outstanding for a longer period than one year, the debt can be assumed a bad debt that cannot be collected anymore.
The entrepreneur who would like to make the claim for the paid VAT on this bad debt no longer needs to start a written procedure with the tax office. The VAT amount can simply be compensated in the VAT return of the period exceeding one year from the start of the bad debt.
However, should the debt become collected nevertheless, certain rules, yet unknown, need to be taken into account. Most logical to us seems that the pro rata VAT rate over the collected part of the debt is due again.
Most important of the new regulation is that there is no transitory legislation. In other words, as of January 1, 2017 any debt that is still outstanding for more than one year at that moment, the VAT can be compensated for without the whole old style procedure.
Why this VAT regulation for a simple matter as bad debts and VAT?
That is because the matter is not simple. The problem in the matter of bad debt and VAT, is that the charging entrepreneur paid VAT to the Dutch tax office and the receiving entrepreneur deducted from the tax office the ‘paid’ VAT. If the invoice was actually paid, this was all well. But the moment the invoice is not paid, the issue starts.
The entrepreneur who paid to the Dutch tax office the VAT would like to claim tax back. At the same time the bad debt VAT entrepreneur did not pay the debt, but has most certainly collected this amount already from the tax office. That implies the tax office is in the middle. One time paying out VAT and another time paying back VAT.
To put a hold on quickly compensated VAT situations, a procedure was installed. We think that in this time and age a written procedure with court cases etc. is no longer in line with reality. That is now fixed with this update.
Orange Tax Services
We welcome this change in VAT procedure legislation with respect to bad debt and VAT very much. At the same time we realize that VAT is not a tax you can do as you wish with. The tax office is very harsh during audits and will not only correct wrongfully processed administrations, but also go to court for money laundering.
As the tax office has the opinion that a VAT return is in fact a banknote. This banknote is false when it cannot be supported with the correct documents that value the VAT return. Might sound strange, but in court this is common practice.