Bad debts – Value Added Tax

Bad debts – Value Added Tax


 

Tourism Industry

 

In recent years, the Cyprus tourism industry has been faced with a number of challenges as a result of the development of other competitive tourist destinations as well as the need to revisit the Cyprus tourism product. The situation has been further aggravated by the general financial crisis in Cyprus, which has led to additional challenges for tourism businesses regarding the collection of debts from their clients being, for the most part, tour operators. This has resulted in an increasing trend in bad debts.

This article aims to analyse the relatively easy procedure that businesses may follow to recover VAT already paid on credit sales in respect of which they have failed to collect the amounts due.

In order for a taxable person to be entitled to claim a refund on the VAT amount paid as output tax on a bad debt, the following conditions must be satisfied:

• The taxable person must have accounted for and paid the VAT corresponding to these transactions. Such person must have taken all necessary measures (under the circumstances) to collect the said amount from their client. Legal action is not, however, a requirement.

• All or part of the consideration must have been written off as bad debt in the accounting books with a corresponding entry in the profit and loss account.

• A period of 12 months must have elapsed from the date of the transaction but no more than 4 years must have passed from the date on which the amount written off as bad debt became payable or the date of the transaction, whichever occurs later. After this four-year period, the right to claim a refund of output VAT on a bad debtor ceases to exist.

• The debtor must be notified in writing within 7 days from the filing of the claim.

 

Documents to be kept in your records

The following records and evidence are necessary in order to file a claim for bad debt relief:

• Copies of the VAT invoices relating to the transactions for which a bad debt relief has been filed;

• Records or other documents proving that VAT on the transaction has been accounted for and paid;

• A separate bad debt account showing:

– the amount you have written off as bad debt

– the VAT amount for which you claim a bad debt relief

– the tax period for which a tax refund has been claimed

– the overall amount of tax paid on each transaction

– the tax period during which the VAT was initially accounted for and paid

– any payment subsequently received for each transaction

– the name of the client

– the date and number of the invoice corresponding to the bad debt.

The taxable person is required to keep all of the above evidence in their records for a period of six years from the date of filing the application.

Tax Return – Which fields of the tax return must be completed when you file a bad relief claim a discount on VAT already paid

The request for VAT refund is entered as an increase in field 4 of the tax return. No decrease in the value of sales will be included in field 6 since the services have been provided or the goods have been delivered, but payment is pending.

 

By Stavri Zenonos Manager, Indirect Tax – Member of the Hospitality & Leisure Team  PwC Cyprus

 

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2014 PricewaterhouseCoopers Ltd. All rights reserved. PwC refers to the Cyprus member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.


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