Lidia Adamek-Baczyńska, Radosław Szajerski
A firm facing an unreliable customer has available to it an option to adjust the taxable amount and the amount of VAT due.
A taxable person who is a creditor in respect of a supply of goods or services may reduce his taxable amount and output tax if the amount due to him in consideration for the supply has not been settled by the debtor or assigned by the creditor within 90 days from its due date. This is called bad debt relief. The relevant VAT return is to be filed by reference to the month that includes the last day of that 90-day deadline (Article 89a(1) and 89a(1a) of the VAT Act).
Polish regulations in conflict with directive
The Court of Justice of the European Union ruled in case C-335/19 (judgment of 15 October 2020) that the bad debt relief may be used by a taxable person (creditor) also where, on the day of the supply of goods or services or on the day preceding that on which the adjusted tax return is filed, the debtor was not registered as a taxable person for VAT purposes or was not the subject of insolvency or winding-up proceedings. Furthermore, the relief is available to the creditor even where, on the day preceding the date of filing of the adjusted tax return, the creditor itself was no longer registered as a taxable person for VAT purposes.
The CJEU’s ratio in case C-335/19 applies also to any restructuring proceedings, such as corporate recovery, involving the debtor (see final judgment of Provincial Administrative Court (PAC) in Poznań dated 17 December 2020, I SA/Po 641/20; final judgment of PAC in Warsaw dated 20 January 2021, III SA/Wa 1373/19; judgment of Supreme Administrative Court dated 17 June 2021, I FSK 2261/15; non-final PAC Wrocław judgments dated 26 May 2022, I SA/Wr 933/21, and 15 September 2022, cases I SA/Wr 882/21 I SA/Wr 883/21; non-final judgment of PAC in Łódź dated 27 September 2022: I SA/Łd 407/22).
In addition to the above conditions, the VAT Act imposed a restriction at Article 89a(2)(5) that bad debt relief remained available for two years from the end of the year in which the invoice evidencing the debt was issued. That restriction was not, however, considered by CJEU in case C-335/19.
Changes as of 1 October 2021
To harmonise Polish law with EU legislation and its interpretation by CJEU in case C-335/19, Polish lawmakers decided to change the VAT Act and reformed its Article 89a(2) by way of the amending act of 11 August 2021. As this law stands now (as of 1 October 2021), the bad debt relief availability period is extended from two to three years but the creditor still needs to continue being a non-exempt taxable person on the day preceding the filing of the VAT return.
Note that keeping that taxable person status requirement goes against CJEU’s judgment in C-335/19. Thus, if a creditor wishes to use the bad debt relief but was no longer a non-exempt taxable person on the day before the filing of its VAT return, the creditor will be able to rely on the direct effect of Article 90(1) of the VAT Directive and if its case goes to court, the court will be required to disregard the taxable person status requirement as it is incompatible with the directive.
With effect from 1 October 2021, the bad debt relief availability period has been extended from two to three years (Article 89a(2)(5) of the VAT Act).
|Bad debt relief conditions||Until 30.09.2021||As of 1.10.2021||Case C-335/19|
|Debtor to be registered as non-exempt taxable person at the time of supply||YES||NO||NO|
|No restructuring, insolvency or winding-up proceedings involving debtor at the time of supply||YES||NO||NO|
|Creditor to be registered as non-exempt taxable person on the day preceding the date of VAT filing||YES||YES||NO|
|Debtor to be registered as non-exempt taxable person on the day preceding the date of VAT filing||YES||NO||NO|
|No restructuring, insolvency or winding-up proceedings involving debtor on the day preceding the date of VAT filing||YES||NO||NO|
|Relief availability period||2 yrs||3 yrs||–––––|
Supplies to consumers
While reforming Polish law to comply with CJEU’s approach in case C-335/19, Polish lawmakers abandoned the requirement that the debtor must be a non-exempt taxable person at the time of supply. However, to enable VAT adjustments in such situations, the amending act of 11 August 2021 introduced, with effect from 1 October 2021, special conditions for use of bad debt relief (added as part of the reform of Article 89a(2a) of the VAT Act). In such situations, the relief may be used also by reference to a time before the effective date of the amended regulations on the basis of CJEU’s case C-335/19.
If the debtor was not a non-exempt taxable person at the time of supply, the taxable amount and the output tax may be adjusted if:
- the debt is evidenced by a final judgment of a court and is being formally enforced; or
- the debt features in a register of debts at the national level; or
- the debtor has been declared bankrupt as a consumer under other laws.
The time to use bad debt relief with respect to invoices issued in 2019 ends on 31 December 2022.
However, if a taxable person was unable to avail himself of the relief due to the incompatibility of Polish law with the VAT Directive (as ruled by CJEU in case C-335/19), that limitation does not apply and he may still make the adjustment later on.
If the creditor was no longer a taxable person on the day preceding the date of VAT return filing, he may rely on the direct effect of Article 90(1) of the VAT Directive, disregarding the Polish VAT Act.
– Court of Justice of the European Union, judgment of 15 October 2020 in case C-335/19 E. sp. z o.o. sp.k. v. Minister Finansów, EU:C:2020:829 (OJ C 423/7, 7.12.2020)
– Article 89a of the Goods and Services Tax Act of 11 March 2004 (consol., Journal of Laws of 2022, item 931, as amended)
– Articles 90 and 273 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ L 347, 11.12.2006, p. 1, as amended)