Bad debt relief in VAT: how to recover the tax on an unpaid invoice?

What is bad debt relief in VAT?

Bad debt relief allows a creditor to correct the taxable base and the output VAT arising from an invoice that the client has not paid.

This lets the company limit the tax consequences of an unpaid sale. However, the relief does not mean recovering the whole receivable. The business owner should still take steps to obtain payment from the client.

Using the relief is the creditor’s right, not its obligation.

When can you use bad debt relief?

The basic condition is non-payment for at least 90 days from the expiry of the payment term stated on the invoice or in the contract.

The period is therefore counted from the date on which the client should have paid, not from the date the invoice was issued.

Before applying the relief, you should also check whether:

• the receivable has still been neither paid nor sold,
• the creditor is registered as an active VAT taxpayer,
• three years have not passed since the end of the year in which the invoice was issued,
• the invoice documents a sale subject to VAT in Poland.

If the client has paid only part of the invoice, the correction may apply only to the remaining, unsettled amount.

For non-standard transactions, including sales to consumers or to entities that are not active VAT taxpayers, additional conditions may apply. Such a situation should be verified with an accountant or tax adviser.

How to use bad debt relief?

1. Find invoices overdue by at least 90 days

Prepare a list covering the invoice number, payment term, net value and VAT, the amount of payment received and the number of days overdue.

2. Check whether the receivable is still unsettled

The correction should not cover the part of the invoice that the client has already paid. You should also check that the receivable has not been sold or settled in another way.

3. Determine the correct settlement period

The correction is tied to the period in which the 90th day after the payment term passed. If the company did not include it in the correct return, a correction of an earlier JPK_V7 may be necessary.

4. Include the correction in JPK_V7

The relief is settled in JPK_V7M or JPK_V7K, depending on how the company accounts for VAT.

5. Monitor later payments

If the client pays after the relief has been applied, the creditor must increase the taxable base and output VAT again in the period in which the payment was received.

With a partial payment, the correction applies only to the part that was paid.

What must a company that has not paid an invoice do?

Bad debt relief also has consequences on the debtor’s side.

If a company deducted VAT from an invoice it received, but did not pay it within 90 days of the payment term, it should in principle correct the input VAT it deducted earlier.

For the creditor, applying the relief is a right. On the debtor’s side, the correction may be an obligation.

After the invoice is paid later, the debtor can increase the input tax again, in proportion to the amount settled.

Bad debt relief does not replace collections

A VAT correction does not make the client pay the invoice. It only limits the tax cost of non-payment.

In the example of an invoice for 12,300 PLN, the company can correct 2,300 PLN of VAT, but it still has not received 10,000 PLN of net remuneration. These funds may be needed for salaries, subcontractors, software, taxes and the day-to-day costs of running the business.

That is why action on the receivable should begin much earlier than after 90 days.

How does Administy solve the problem of unpaid invoices?

Administy automates the entire process of monitoring and recovering receivables. The system plans, sends and escalates payment reminders on its own, according to a scenario set in advance.

The process can start even before the payment term expires and can include:

• a neutral payment reminder before the due date,
• a message sent immediately after the payment term,
• further stages of soft collections,
• a change in the tone and frequency of communication as the delay grows,
• escalation of the case to the people responsible for recovering receivables,
• passing information to a lawyer that a pre-action demand for payment needs to be sent,
• informing the accounting team after 90 days of delay that the invoice needs to be checked for bad debt relief and a VAT correction.

Thanks to integration with bank data, Administy can recognise a payment and stop further payment reminders once the receivable is settled. This reduces the risk of sending a message to a client who has already made the transfer.

The company can also create different communication paths depending on the type of client, the amount owed and the nature of the relationship. A long-standing business partner who is a few days late can be approached differently from a client with several invoices overdue for many weeks.

Administy does not replace an accountant or a tax adviser. It does, however, automate operational work and gives the responsible people up-to-date information, so that an invoice is not noticed only after many months.

The most common mistakes

Counting 90 days from the invoice issue date

The period should be counted from the day the payment term expires.

No control of partial payments

The correction may cover only the unpaid part of the receivable.

Missing the three-year deadline

The possibility of using the relief is limited in time. The period is counted from the end of the year in which the invoice was issued.

No correction after payment is received

If the client pays after the relief has been applied, a corresponding reverse VAT correction is required.

Treating the relief as debt recovery

The relief reduces the tax burden, but it does not replace collections or payment from the client.

Confusing VAT relief with PIT or CIT relief

Bad debt relief also exists in income taxes, but the rules for applying it differ from those in VAT.

Frequently asked questions

After how many days can you apply bad debt relief in VAT?

As a rule, after 90 days have passed from the payment term stated on the invoice or in the contract.

Is bad debt relief mandatory?

For the creditor it is a right, not an obligation. The debtor, on the other hand, may be obliged to correct the VAT it deducted.

Can the relief apply to part of an invoice?

Yes. If the client has paid only part of the receivable, the correction may cover the remaining unpaid amount.

Do you have to take the matter to court first?

In a typical B2B transaction, taking the matter to court is not a basic condition for applying the relief. Non-standard cases are, however, worth consulting with an accountant or tax adviser.

What should you do if the client pays after the relief has been applied?

You need to increase the taxable base and output VAT in the return for the period in which the payment arrived.