In recent years, it has become common for many companies to encounter situations of unpaid credit from customers. In this scenario, companies face two conflicts:

• VAT paid to the Tax Agency that is ultimately not collected.
• Tax deductibility of impairment due to recorded bad debts.

In this article, we’ll analyze the first question raised: how and under what circumstances we can recover VAT on Bad Debts.

Law 37/1992, of December 28, on Value Added Tax (hereinafter, LIVA) regulates, in its articles 80.Three and Four, the possibility for the taxpayer to voluntarily modify the VAT tax base when there is a situation of non-payment of invoices issued to its clients.

It should be noted that the tax base modification does not apply to loans secured by real estate, secured by credit institutions or guarantee companies, or covered by a credit insurance contract.

In this sense, the company could reduce the tax base when the credits are totally or partially uncollectible.

Requirements to reduce the tax base and recover VAT:

1. One year has passed since the accrual of the tax charged without achieving its full or partial collection, or since the expiration of the unpaid term or terms.

Likewise, a six-month period is established for modifying the tax base for SMEs. These businesses can modify their tax base either after the previous period (six months) has elapsed or by waiting for the general one-year period.

2. Reflect this circumstance in the VAT record books.

3. The recipient of the transaction must act as a business owner or professional, or, otherwise, the taxable amount, excluding VAT, exceeds 300 euros.

4. Request collection through a judicial claim or a notarial request. In the case of debts owed by public entities, collection may be requested through a certification issued by the auditor or treasurer of said entities.

Procedure:

The procedure to be followed by the taxpayer to modify the VAT tax base requires issuing and sending the corrective invoice to the debtor within three months following the end of the year, or the six months mentioned above, and subsequently, within one month of issuing the invoice, communicating this modification to the Tax Administration electronically using Form 952, providing a copy of the corrective invoice and the legal claim or notarial request made. The corrective invoice must also be included in the corresponding VAT Form 303.

Applicable regulations.

The regulations used were Law 37/1992, of December 28, on Value Added Tax.

Sandra Recio Espinosa