Change in the interpretation of the six-month deadline for the correction of VAT of receivables in insolvency proceedings – with the possibility to reclaim VAT three years prior
Creditors and VAT payers may recover the amount of VAT due from borrowers who are in insolvency proceedings even for receivables arising less than six months immediately prior to the decision on bankruptcy. The Supreme Administrative Court (NSS) has issued a groundbreaking decision (Afs 170/2014-42) concerning the correction of VAT of receivables in insolvency proceedings.
As of April, 2011, the VAT Act in §44 it permits a reduction in the output of VAT of receivables from customers in insolvency proceedings. This provision contains a number of conditions that must be simultaneously met. One of the conditions is the age of receivables defined in the Act as follows: “… a receivable incurred no later than six months before the bankruptcy court’s decision…” The wording used in the Act sparked a number of conjectures after the amendment of the law. It was not clear whether it concerned claims arising six months immediately before a court decision on bankruptcy, or, claims made six months and older before the court decision. Professional public and administration still hold the view that corrections held under this provision pertain to claims arising six months and older before the bankruptcy court’s decision.
NSS, however, in the above-mentioned judgment came to the opposite conclusion, namely, that the correction held under that provision is only possible for claims incurred six months prior to the bankruptcy court’s decision. NSS, in judgment, substantiate that their decisions are based on the meaning and purpose of that provision, which should enable VAT corrections within truly “pre-bankruptcy” debts incurred maximally up to six months before the bankruptcy court’s decision. This opinion of the court is based both on the Explanatory Memorandum to the Amendment of the Act, as well as from the draft of the submitters of the provision.
Carrying out the correction of VAT of receivables from debtors in bankruptcy proceedings, the possibility to easily obtain a significant part of the remuneration of bad debts emerges. Taxpayers should monitor the three-year limitation period for the possibility of executing corrections, e.g. for claims with a date of the taxable event in March, 2012, this limitation period will expire 31 March, 2015.
We expect that this practice will soon be changed and, therefore, we recommend a revision of receivables where this existing procedure could be exploited. The state cannot require returning VAT due to an incorrect assessment of any procedure.
Author: Jaroslava Cihelková