Irrecoverable receivable

What it means

An irrecoverable receivable is a state defined precisely in the VAT Act: the supplier has already paid tax on a supply the customer never settled. The law then lets the supplier reduce the taxable amount and get the tax back.

This is not an accounting impairment allowance and not an income tax write-off of a receivable. Those work on profit or loss and on the income tax base, whereas irrecoverability concerns value added tax alone.

The correction covers only the unpaid part: if the customer settled half the invoice, only the tax on the remainder is reduced. And if the debtor pays after all, the supplier has to increase the taxable amount again, so irrecoverability is not a final farewell to the receivable but a state that can be reversed.

How it works in practice

The Act lists the grounds: enforcement that has run for twelve months without recovering the debt, the customer’s bankruptcy with a properly lodged claim filing, the customer ceasing to exist without a legal successor, the death of the debtor, or a receivable long past its due date where the supplier can show that it pressed for payment.

The route is a correction of the taxable amount: the supplier issues a corrective document, delivers it to the customer and reports the reduction in the return and in the control statement. The customer must give back the deducted tax in the same amount.

For overdue receivables we keep a record with the client of every collection step: reminders sent, the pre-action letter, the application for a payment order, enforcement. When one of the statutory grounds then arises, the evidence that the supplier pressed for payment is already in one place and the VAT correction can be made without searching for it.

What to watch out for

A company writes the receivable off to expenses and leaves the VAT correction for later. The window for the correction is limited by law, and once it closes, the tax paid on an invoice nobody ever settled stays with the state for good.

The correction cannot be made before one of the statutory grounds exists. A company that reduces its tax at the first reminder because the customer will not pay anyway has reduced it without entitlement, and at an audit it pays the tax back with a penalty and interest.