VAT and Bad Debt Relief reminder – 35/19 E. Sp. Zoo Sp.K.

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This case C-335/19 E. Sp. Zoo Sp.K. concerned Bad Debt Relief  (“BDR”) claimed by a Polish VAT registered company which was in the business of providing tax advice to VAT registered businesses. VAT at the standard rate was charged. The debtor was registered for VAT on the date the service was provided. Following this the debtor went into liquidation.

The question that arose was whether the supplier was entitled to make a claim for BDR. This was in light of Polish VAT legislation precluding a BDR claim where both the creditor and debtor did not remain registered for VAT, shortly before the submission of the claim. In effect, where the debtor had entered into insolvency proceedings, no such claim was available to the supplier under Polish law.

The Polish court referred the following questions to the CJEU:

  • Can the tax status of a creditor or debtor be used by a member state as an argument to restrict a BDR claim being made; and
  • Where the debtor is engaged in insolvency proceedings / is in liquidation – can this be used as a condition of not making such a claim?

CJEU Decision – Taxpayer won

The CJEU found that BDR claims should be permitted provided that there was a reasonable probability that the debt would not be paid. This was subject to the relief being clawed back if payment later materialised.  The Polish conditions were contrary to EU law and should not apply.

Who is Potentially Affected?

Cleary this only has ramifications for Polish businesses and the opportunity for them now to submit VAT BDR claims.

However, it serves as a good reminder to UK businesses of the rules surrounding when a BDR claim may be made. This is particularly relevant to the situation which we find ourselves currently in i.e. COVID-19 territory.

Where you make supplies of goods or services to a customer but you are not paid you may be able to claim relief from VAT on bad debts you have incurred. If you are a UK business, the conditions for making a claim are set out in HMRC Public Notice 700/18.

The supplier may claim BDR where he holds the required records for making a claim and the required period of time has passed i.e. period of 6 months following the later of the date of the supply or the due date for payment. It must also be remembered that the debtor MUST repay any VAT previously claimed back to HMRC, if he has not paid for the supplies within 6 months.

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