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Correction of tax amount during insolvency proceedings – amendment of VAT Act

Amendment to the Act on Value Added Tax effective from 01.04.2011 – correction of the tax base of receivables from debtors in insolvency proceedings

Currently the Act on Value Added Tax offers the possibility of output tax correction if the client (debtor) did not pay the supplier (creditor) for goods delivered or service provided and is in insolvency proceedings.

The conditions for making a correction:

1. An unpaid receivable for taxable supply the output VAT of which the payer had to pay

2. Claim towards the debtor occurred 6 or more months before the court’s decision on insolvency and has not ceased to exist until now. Example: In case of decision on insolvency from 28.4.2010 the correction may be made for receivables which occurred before 28.10.2009, which is 27.10.2009 at the latest.

3. Creditor filed the claim to insolvency proceedings on time and the claim is being taken into consideration in these proceedings.

4. Creditor and Debtor are not related persons (as stipulated by the Act on VAT).

5. Debtor is still a payer of VAT.

6. Creditor delivered the corrective tax document to debtor (issued in accordance with section 46 of the Act on VAT).

From the above mentioned example it is clear that receivables, which occurred before the effective date of the Act amendment (it means before 01.04.2011) may be corrected as well. However the correction cannot be
done, if 3 years passed from the end of the taxation period in which the original taxable supply occurred. This means that in the first VAT return after the date of the amendment that enables the corrections (which is April 2011) it will not be possible to correct the receivables, if their taxable supply was before 01.04.2008.

The correction of tax amount is done in the regular tax return for the period in which the corrective tax document was sent to a debtor – the creditor decreases the output tax on the line 1 or 2 of the tax return. In the very same period the debtor is required to decrease the tax deduction he originally claimed. The creditor shall enclose copies of all issued tax documents to the tax return, for which the correction of the tax amount was applied (this means the copies of original tax documents) together with the report of corrections. The recommended format of report statement may be found on the web page of Czech Tax Administration.

In terms of accounting and income tax it is important to note, that the amount of receivable does not change, it remains in the original amount (correction of the tax amount is booked in profit and loss account).

This means, that the amount of created adjustment does not change either. If the debtor pays (even partly) the debt or if the creditor assigns this receivable to a third person or if the creditor has his VAT registration cancelled, than the creditor is required to pay the claimed tax back.

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