How to reclaim input VAT on bad debts?

The different systems for passing on collected VAT

Depending on the type of sale, VAT is not paid to the government at the same time:

• VAT on debits: Invoicing for goods or merchandise: the company must pay VAT to the State as soon as the invoice is issued, regardless of whether or not the customer has paid the invoice.
• VAT on incoming payments: Invoicing for services or work: VAT is payable only when the invoice is received.
  This eliminates the need to advance VAT.
  This simplifies cash management.

If VAT is applied to incoming payments, there is no VAT impact in the event of non-payment.
This is because the VAT has never been paid to the Treasury.
On the other hand, under the VAT on debits system, if the invoice remains unpaid, it is important – and necessary – to make a claim to recover the VAT paid to the administration, which will ultimately never be paid by the customer.

When can VAT paid on bad debts be reclaimed?

Article 272-1 of the French General Tax Code stipulates that tax can only be recovered when receivables have become definitively irrecoverable.
The tax can only be charged or refunded if the supplier can demonstrate that his claim is definitively irrecoverable.
This raises the question of what constitutes a “bad debt”. The mere failure to collect a receivable when due is not sufficient to establish bad debt status, whatever the reason for non-payment (NSF cheque, insolvency, trade dispute).
Nor does the fact that the debt is covered by a provision for doubtful or disputed debts justify recovery of the corresponding tax.
The document providing definitive proof that a debt is irrecoverable is the “certificate of irrecoverability”. This can be issued in two cases.

Certificate of uncollectibility issued in bankruptcy proceedings

In France, in the event of financial difficulties, the commercial court can provide a framework for the company in difficulty via four collective procedures:

• Judicial liquidation: VAT can be reclaimed from the date of the court decision pronouncing the judicial liquidation.
• Court-ordered reorganization: VAT can be reclaimed from the date of the judgment establishing the reorganization plan.
• Conciliation and safeguard: VAT is not recoverable because the claim is not considered lost.

In the event of liquidation or receivership, the liquidator or the mandatary shall submit a report to the court. certificate of uncollectibility to the creditor, who can then claim back the VAT paid in advance.

Outstanding payments and certificates of irrecoverability outside bankruptcy proceedings

In practice, a debt is considered definitively irrecoverable on the date when the creditor, unable to recover what is owed to him and having exhausted his right to sue the debtor, definitively balances the debt in the accounts via an expense account.
It is difficult to know exactly when the “right to sue” has been exhausted.
To be considered as such, a debt must have been the subject of regular, unsuccessful reminders, attesting to the debtor’s inability to pay.
The company must keep detailed records of these actions.
As the debtor’s inability to pay may be assessed differently by the authorities, it may be advisable to obtain a certificate of uncollectibility.
This certificate is issued by a collection company which, as a regulated profession, can issue a certificate of irrecoverability after attempting to collect the debt.
This document can be used against the tax authorities if VAT recovery is called into question.

VAT recovery procedures

Once uncollectibility has been established, the company can claim back the VAT advanced to the Treasury. In principle, this is done by deducting the VAT (line 21: “Other VAT to be deducted”) from the monthly CA3 VAT return.
If it is not possible to offset the VAT, a refund can be claimed.
Requests for imputation or refund must be made by December 31 of the second year following the year in which the event giving entitlement to recovery occurred.
Example: if a certificate of irrecoverability is obtained on May 31, 2024, the claim must be settled before December 31, 2025.